Third-Quarter Earnings Should Keep the Profit Rebound Going

Third-quarter earnings season unofficially kicks off after the markets close Thursday when Dow component Alcoa (AA) reports. The expectation for the quarter is that the rebound in corporate profits will continue apace. With so much cash sitting in fixed income or on the sidelines entirely, some big-name beat-and-raise earnings reports could be just the spark to ignite that market-moving dry powder.

After all, the seeds of the market's current rally were planted back in July with strong second-quarter earnings, says Cort Gwon, director of trading strategies and research at FBN Securities. If earnings can give stocks just a few more percentage points of a boost, institutional and individuals are likey to come back into equities.

"There is a lot of money sitting in fixed income," Gwon says. "Once stocks are up 4%, 5% on the year and some confidence returns on the part of longer-term investors, a 1% to 2% return in bonds doesn't look so appealing anymore."

Financials Should Lead the Way

The S&P 500 ($INX) is forecast to post a 24% increase in third-quarter earnings, according to data from Thomson Reuters, marking the fourth straight quarter of earnings growth after nine straight periods of year-over-year declines. And the profits should be spread pretty far and wide: Eight of the 10 major market sectors are expected to show growth over the same period in 2009.

As has been the case throughout the great profit recovery, financials are expected to lead the way with 68% year-over-year profit growth, according to analysts polled by Thomson Reuters. But then, once again, that's more an effect of easy comparisons against weak figures last year.

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The second-best performer should be the industrials sector with a 43% profit increase, helped by aerospace and defensive stocks. That puts Dow component Boeing (BA), slated to report Oct. 20, even more in the spotlight than usual -- and might make investors care about airlines stocks once again. The air carriers are expected to post profit growth of more than 720%. (Easy comparisons again.)

Materials, energy and tech are all seen reporting earnings growth of more than 30% -- but analysts expect a case of haves have-nots within those larger groups. The oil and gas drilling industry is forecast to show a 23% drop in year-over-year earnings, according to Thomson Reuters. More happily, tech is predicted to earn a total of $37.5 billion in third-quarter earnings, which would tie its second-best quarter in dollar terms since Thomson started tracking the data 12 years ago.

Among other laggards, the health sector is expected to break even for the quarter, while telecoms are seen reporting a 8% decline in year-over-year earnings.