Worst Quarter in Five Years?

Though the major averages in the U.S. closed out the third quarter with strong gains, the extent of the subprime mortgage and liquidity crisis that plagued financials and rattled global markets during the summer remains to be fully seen.

Many traders and investors are hoping that the upcoming swarm of third-quarter earnings reports will finally give a reliable indication of how much spillover businesses will have to contend with.

The earnings season unofficially kicks off Tuesday, when basic materials giant Alcoa (AA Quote - Cramer on AA - Stock Picks) reports after the closing bell.

As of Friday, Thomson Financial pegged overall third-quarter earnings growth for the S&P 500 at an anemic 1.4% rate. Should that come to pass, it would be the worst performance since the second quarter of 2002, when earnings rose by the same amount.

Analysts note that a weaker U.S. dollar, which continually set record lows against the euro during the third quarter, undoubtedly aided some export-heavy sectors. Unfortunately, the belief is that housing woes and a slowdown to the U.S. economy will sabotage profit growth for many.

"Downward estimate revisions have already come in from the banking sector, consumer finance, and mortgage companies," notes John Butters, research analyst with Thomson Financial.

As the Dow Jones Industrial crossed back above the 14,000 level last week, though, it became apparent that traders believe the estimate is unreasonably low, and that they expect companies to surprise to the upside during the reporting season.

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