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Wall Street analysts always cut their earnings estimates as a quarter progresses. (Which then lets lots of companies beat forecasts when they actually report.) But for the fourth quarter of 2019, the cuts to earnings estimates for the companies in the Standard & Poor’s 500 are coming at a faster than usual pace. It’s just abut certain that actual earnings will come in above estimates when companies report in January, but the current pace of estimate cuts makes it quite possible that earnings growth will turn negative for the fourth quarter.

That would result in an earnings recession–two quarters in a row of falling earnings for the S&P 500 companies–for the first time in almost four years.

Two months into the fourth quarter, analysts have shaved 4% off their estimates for S&P 500 earnings to$41.12 a share, a drop of almost 1% year over year after a 1.3% decline for the third quarter. The pace of the drop in estimates has been exceeded only twice since 2015.

The cuts to estimated earnings have left U.S. stocks a little over-extended. The 17.7 price to earnings ratio on forecasted earnings per share puts the S&P 500 multiple above the 5-year average of 16.6 times projected earnings per share and above the 10-year average of 14.9.

The relatively modest nature of that premium to historical multiples is a result of Wall Street’s continued optimism about earnings growth in 2020. Analysts currently project 9.2% growth in S&P 500 earnings for 2020.

That saying about not counting your chickens until they’ve hatched comes to mind, however. Eight months ago analysts projected that fourth quarter 2019 earnings would grow by more than 9%. Now the projection is for a return to 10% earnings growth in the second half of 2020.
In what passes for reality these days, with 92% of S&P 500 companies reporting third quarter earnings, 75% beat analyst estimates. That’s above the 5-year average. But the aggregate beat was just 3.9%, which is below the 5-year average.

More beats. But by less.