Earnings season, with its make-or-break excitement, reminds me of post-season baseball.

In terms of sports teams, Bostonians such as myself constitute a nationwide diaspora, and the Red Sox faithful were disappointed this year when our team finished dead last in the American League East. For third-quarter earnings performance, let’s hope the S&P 500 fares better.

The Q3 2022 earnings season kicks off Friday, with operating results from major banks such as JPMorgan (NYSE: JPM), Citigroup (NYSE: C), and Morgan Stanley (NYSE: MS). Earnings aren’t expected to implode, but Wall Street’s expectations have gotten increasingly pessimistic.

Let’s examine the prospects of corporate profits. I also parse the latest consumer price index (CPI) report that was released Thursday.

For Q3 2022, the estimated year-over-year earnings per share (EPS) growth rate for the S&P 500 is 2.4%, according to research firm FactSet. If 2.4% turns out to be the actual growth rate for the quarter, it would represent the lowest EPS growth reported by the index since Q3 2020 (-5.7%).

Earnings revisions have been trending sharply downward, as elevated inflation, economic contraction, supply chain disruptions, and monetary tightening take their toll.

Given the 40% international revenue exposure of the S&P 500, unfavorable foreign exchange rates caused by the strengthening of the U.S. dollar have posed a challenge as well.

Read This Story: Why a “Strong” U.S. Dollar Is Both a Blessing and a Curse

The conspiracy-mongering doomsters who predict that the dollar will soon get dethroned by another currency (say, the Chinese yuan) are wrong. In fact, the America-is-in-decline school of thought has been wrong for decades. The dollar still reigns supreme and it hovers at a 20-year high.

In the U.S., the greenback’s strength is good news for consumers, but a dilemma for exporters. A stronger dollar makes U.S. exports more expensive to foreign customers and that erodes the profits of many U.S. companies.

On June 30, the estimated EPS growth rate for Q3 2022 for the S&P 500 was 9.9%. As of this writing, 10 sectors are expected to report lower earnings (compared to June 30) due to downward revisions to EPS estimates.

For Q3, 65 S&P 500 companies have issued negative EPS guidance and 41 S&P 500 companies have issued positive EPS guidance.

Beating expectations…

Most S&P 500 companies typically report actual earnings above estimates, which begs the question: what’s the likelihood the index will beat expectations this time around?

Based on the average improvement in EPS growth during the past few earnings seasons due to companies reporting positive surprises, the index probably will report EPS growth for Q3 of between 6% and 7%.

The actual EPS growth rate has surpassed projected growth at the end of the quarter in 39 of the past 40 quarters for the S&P 500 (Q1 2020 was the outlier).

Over the past 10 years, actual earnings reported by S&P 500 companies have exceeded estimates on average by 6.5%. Over the past five years, that number has been higher, at 8.7% (see chart).

Among the 11 S&P 500 sectors, four are projected to report year-over-year EPS growth, led by energy and industrials. Seven sectors are predicted to report a year-over-year decline in earnings, led by communication services and financials.

The financials sector is projected to post the second-worst year-over-year earnings decline of all 11 sectors, at -13.5%. We’ll get a clearer idea of how economic headwinds are affecting the bellwether banks, when they report results on Friday.

With inflation at persistently elevated levels, it’s encouraging to see that net profit margins are holding up. The estimated net profit margin for the S&P 500 for Q3 is 12.2%, which is above the five-year average of 11.3% and in line with the previous quarter’s net profit margin of 12.2%.

Many companies have been resourceful in dealing with inflation, by cutting costs and wringing efficiencies from their battered supply chains. Firms with pricing power, notably makers of branded consumer staples, have generally achieved success in raising prices without significant consumer push-back…at least, so far.

Inflation: still the big story…

We’re about to plunge into a new earnings season, but the dominant story remains inflation.

The U.S. Bureau of Labor Statistics reported Thursday that overall CPI inflation rose 8.2% in the year through September, surpassing estimates but a slight moderation from the 8.3% increase in the year through August.

The “core” CPI (minus volatile food and energy) climbed 6.6%, the fastest pace of annual increase since 1982. On a monthly basis, the CPI rose 0.4% in September after rising 0.1% in August. Consensus expectations had called for increases of 0.2% month-over-month and 8.1% year-over-year.

The upshot: Inflation is still way too hot. And yet, after initially plummeting on the news, U.S. stocks reversed direction and soared Thursday. Investors shook off their angst and concluded that perhaps inflation is close to peaking.

The main U.S. stock indices finished Thursday as follows: The Dow Jones Industrial Average +2.83%; the S&P 500 +2.60%; the tech-heavy NASDAQ +2.23%; and the small-cap Russell 2000 +2.41%. Trading was volatile.

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John Persinos is the editorial director of Investing Daily.

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