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3 Sectors That Will Blow Your Mind This Earnings Season

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It's been said of magic that the hand is quicker than the eye. If you're looking in the wrong place you will be fooled.

Such is the situation for third-quarter earnings season where, according to senior earnings analyst John Butters of FactSet, we're on the cusp of what could prove to be some pretty baffling results.

As Butters explains in the attached video, things are not always as they seem when it comes to profit expectations. This is especially true on the sector level, where he says all 10 sectors have seen their growth rates lowered during the past three months, but none more than the materials sector (IYM).

Related: Earnings Season Hopes Plunge 50% in 90 Days

Specifically, he says over the course of the quarter the collective growth outlook for materials stocks has gone from 15% in July to just 1% today, a fact that makes it much easier for companies like Alcoa (AA) to deliver in-line results. (For the record, FactSet data shows the aluminum producer and former Dow member saw its EPS estimates go from $0.10 to $0.06 in the course of a quarter.)

Butters is also raising the flag on the financial sector, which on paper is expected to deliver a market-leading 9% pop in profits. While that's nothing to sneeze at given that the full S&P 500 is pegged to grow earnings by only 3%, Butters says if the results of just two of the 81 stocks that make up the market's biggest sector are backed-out, that impressive nine-handle growth rate suddenly slumps down to a small contraction.

That's right. If only the hefty "growth rates" (due to easy comparisons from a year ago) of Bank of America and Morgan Stanley are excluded, financial sector earnings growth would come in at -0.4% and would also slice the full S&P 500's growth rate in half.

Butters' research shows that similar traps can be found this quarter in the energy patch, where the top two titans of the sector are pegged to show vastly different results from a year ago. Specifically, analysts see ExxonMobil's EPS slipping 9% this quarter, while its closest-sized rival Chevron is seen posting a 30% year-on-year gain.

Again, if you just back out Exxon's expected slump, the energy sector's modest 2.2% profit dip suddenly becomes a 3% gain. And the single-stock impact of Chevron is even more dramatic, because without the company's contribution to profit growth, the energy sector becomes a bit of a disaster and would slump to -8.0% .

The point of all this number crunching is not to confuse, but simply to enlighten, to warn investors of impending traps, and to illustrate that profit outlooks aren't always as they seem.

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