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Today’s market action will likely show continuation of the tentative mood of the last few trading sessions, though the release of two economic reports of middling significance after the market’s open may give it a modest positive nudge. The reports in question are the July Case-Shiller home price index and the Conference Board’s September Consumer Confidence report. Both readings are expected to show improvements from the prior month’s levels.
 
The next few trading sessions are unlikely to be much different from the last few,  despite the release later this week of the August Durable Goods and Personal Income & Spending reports. We do have top-tier economic data on deck for release next week, particularly the September non-farm payroll report and the manufacturing ISM report. But my sense is that the market will wait for the third quarter reporting season before making a decisive directional move.

Third quarter earnings are expected to be down 3.4% from the same period last year, with half of the 16 Zacks sectors expected to have negative year-over-year earnings comparisons. Should actual results meet these expectations, we will get the first quarterly earnings decline since the start of the earnings recovery in 2009. But I don’t expect the earnings decline in Q3 to trigger a market sell-off.
 
What could change the market mood, however, is guidance for the following quarters, particularly the fourth quarter. This is critical as current expectations are for a notable turnaround in earnings growth in the fourth quarter, with total earnings for the S&P 500 expected to be up in excess of 7%. Given the overall negative tone of recent pre-announcements from FedEx (FDX - Analyst Report), Intel (INTC - Analyst Report) and from Caterpillar (CAT - Analyst Report) today, those fourth quarter growth expectations may be a bit too optimistic. It may be difficult for the market to sustain recent gains while corporate profitability is eroding.

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