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3 Key Themes to Watch This Earnings Season

So we are off and running with earnings season and the early results are decidedly inconclusive. Alcoa (AA) missed its EPS estimate by a smidge but gave somewhat optimistic guidance. Meanwhile Pepsico (PEP) beat the street by a penny on solid 13% sales growth but warned of waning tailwinds from the weak dollar.

What's amazing, but perhaps not surprising, is that given the turmoil in the market of the past few months, we go in to the third quarter season with estimates that have been slashed by 30% from where they were 3 months ago. Even so, if consensus estimates are simply met, it will mark another quarter of double-digit earnings growth for the S&P 500, despite economic headwinds domestically and all over the world.

"Overall we are seeing fairly broad-based growth across the sectors," says John Butters, senior earnings analyst at FactSet. "Nine of the ten sectors are expecting growth on the earnings side and all 10 sectors are expecting growth on the revenue side."

The clear growth leaders continue to be commodity related sectors, with Energy sector profits seen rising 43%, seconded by Materials sector growth of 32%, while Utility earnings are forecast to fall 1%. If you were to exclude the out-sized growth expectations for Energy and Materials, the S&P 500's growth would slip from 12% this quarter to just 8%.

What's ironic, is that in terms of market performance the past 3 months, Utilities have fared the best and are up 1% while Materials and Energy have suffered the hardest hits. The sectors have fallen by 15% and 13% respectively, while the S&P 500 has shed about 7.5%.

In the attached clip, Butters says these are three key themes to watch and listen for this season: The impact of declining commodity prices, updates on the growth story from emerging markets, and of course future expectations, a.k.a. guidance.

On the first point, Butters explains the commodity decline is either a pro or a con for the bottom line and points to Alcoa as a loser from declining aluminum while hinting that consumer discretionary and staples companies should benefit from reduced input costs.

Of course, the mother of all estimates is for 2012 and whether its recent decline is properly reflecting a slowdown or overly pessimistic. For the record, Factset data shows in the past 10 months the S&P consensus for next year has gone from $108 up to $113 in August, then back down to $110 where it stands right now. By way of comparison, Doug Kass recently told us that he thinks the market has priced in earnings of only about $80 for next year.

Although its still too early to draw conclusions, our Factset earnings guru says about 72% of the two dozen companies that have reported results so far have topped estimates, matching a trend of positive surprises that dates back two years.