Earnings, the economy, and crude oil prices are likely to drive trading, as the S&P 500 tests its trendline support. Read More. 

Fourth Quarter North America deals total $10.8 billion
Citi-Morgan Stanley Could Kick Start Other Deals

Alcoa (AA) unofficially kicks off the earnings-reporting season with a release due out Monday after the closing bell. Analysts expect the aluminum company to post a 10-cent loss for the fourth quarter, which compares to a 36-cent profit from the year before.
 

In fact, earnings are expected to fall throughout the materials sector. The table below breaks down year-over-year earnings growth rate expectations by S&P 500 sector. Total earnings in the basic materials group is expected to fall 50 percent compared to the fourth quarter 2007. Consumer discretionary (cyclicals), energy, industrials and technology companies are also expected to post profits well below last year’s levels.
 

That’s the bad news. 
 

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On a brighter note, total S&P 500 earnings are expected to rise 6.4 percent, which is considerably better than the 23.5 percent year-over-year decline the quarter before. Financials are expected to return to profitability (EPS numbers in the table for the fourth quarter and beyond in the financials is the total EPS rather than growth rates because the group posted negative earnings last year and computing growth rates produced meaningless numbers). Consumer staples, utilities, healthcare and telecomm stocks are also expected to show positive year-over-year earnings during the fourth quarter. 
 

The danger is the forward-looking assumptions in current estimates. By the third quarter, year-over-year S&P 500 earnings are expected to show growth in excess of 32 percent. Such strong profit growth in the face of ongoing deterioration in the economy might be a difficult feat to accomplish. So, the risk going into the fourth quarter earnings-reporting season is not necessarily past earnings, but what companies say about the outlook for the remainder of 2009.  

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