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Q3 EPS Outlook: Fool Me Once, Shame on You. Fool Me Continuously, Shame on Me.

The third-quarter earnings reporting season will soon be upon us. As of September 25, Capital IQ aggregate estimates project S&P 500 operating EPS to decline by 4.6% year on year. Many investors are taking this estimate with a grain of salt, however, since Wall Street analysts predicted the second quarter would be off by a similar 4.5%, for the first year-over-year decline in earnings since the third quarter of 2009.

However, the S&P 500 went on to eke out an EPS increase of 0.1%. But this isn’t the first time analysts forecasted an EPS decline only to have the actual result ultimately poke its head above water. Wall Street analysts also expected the market to record a 3.2% decline in Q1 2015, only to have it race ahead to a 3.2% gain.

Indeed, in the past 14 quarters, the actual EPS outpaced the estimated results by an average of four percentage points, and an average 66% of the companies in the “500” beat their estimates.

This quarter, Capital IQ aggregate estimates are looking for a 4.6% decline in EPS, driven mainly by a near 66% drop in year-over-year results for the energy sector. Excluding the drag from energy, the Q3 EPS growth expectation would be for a gain of 3.1%. Three more sectors -- Consumer Staples, Materials and Tech – are also projected to post EPS declines, while Consumer Discretionary, Health Care, and Telecom Services should see the largest gains.

S&P 500 EPS Growth Estimates as of 9/25/15

So there you have it. Most sector analysts point to weak oil prices, energy sector cutbacks, a strong U.S. dollar, and weakness in China and other emerging markets as the main headwinds that could cause a third-quarter slowdown in year-over-year S&P 500 sector EPS growth.

And while actual Q3 EPS results will likely come in ahead of estimates, as they did in each of the previous 14 quarters, the depth of the predicted shortfall implies that this third successive quarterly estimate for the first negative reading since Q3 2009 may finally come true.

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