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The U.S. third quarter earnings season kicks-off this week with a spate of big bank profit updates that could both define with weakest sector performance in three years and set the tone for broader equity market direction between now and the end of the year.

Big cap banks such as JPMorgan (JPM) - Get JPMorgan Chase & Co. Report , Citigroup (C) - Get Citigroup Inc. Report , Goldman Sachs (GS) - Get Goldman Sachs Group, Inc. Report , Wells Fargo (WFC) - Get Wells Fargo & Company Report as well as Wall Street rivals Morgan Stanley (MS) - Get Morgan Stanley Report and Bank of America (BAC) - Get Bank of America Corp Report will highlight the first major reporting week of the season, which starts Tuesday, amid an expected schedule of around 50 S&P 500 companies reporting third quarter profits.

"We expect a weak 3Q, led by steep fall in rates and slower loan growth but tempered by swift cuts in deposit rates and sharp growth in securities portfolios, especially Treasuries," JPMorgan analysts noted late last week. "Economic indicators have been mixed, which is likely to keep markets choppy, and repo market volatility is likely to continue, possibly increasing near year
end, which would add to volatility in the markets."

"We expect earnings to remain pressured by lower rates and uncertainty around the impact of trade wars and politics," the bank added.

Data from I/E/B/S Refinitiv suggests collective third quarter earnings for the broadest benchmark of U.S. stocks will fall around 3.2% from the same period last year, to around $337.9 billion on a share-weighted basis. FactSet data has the third quarter decline forecast at 4.1%.

Financial sector earnings are likely to fall 1.2% from last year, Refinitiv estimates, cementing the worst quarter in three years. However, FactSet is forecasting a fourth quarter rebound of 14.7% and a collective bottom line of $62.3 billion.

Healthcare is set to pace the major sectors with a 2.5% rise in third quarter earnings, based on Refinitiv forecasts, and a collective bottom line of $53.4 billion. Real Estate earnings will grow faster, at 2.7%, but only contribute around $9.7 billion.

On the downside, with crude some 27% lower than it was last year, and WTI prices down 8.5% for the third quarter itself, energy sector stocks are likely to see a collective 34.3% decline in profits to around $14.6 billion. 

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Stripping away the energy sector improves that figure to a 1% decline, and fourth quarter estimates suggest a solid rebound for the three months ending in December, but the weakness nonetheless underscores both the slowing fundamentals of the domestic economy and the lingering uncertainty over U.S.-China trade relations.

Friday's 'Phase 1' agreement on trade between Washington and Beijing, which lacked both a back-up text and left significant issues unresolved, snuffed out Wall Street's two-day rally and set global markets on edge at the start of the trading week.

Investors were also rattled by the Federal Reserve's decision to extend overnight repo operations until at least January, while pledging to resume bond purchases at a pace of $60 billion per month, in order to support the level of excess reserves in the banking system.

Still, positive signals for U.S. stocks are also evident, with the chance of a Fed rate cut in October now priced at around 75%, according to the CME Group's FedWatch tool, and the 12-month forward P/E ratio for the S&P 500 trading at 16.5, just shy of the benchmark's five-year average of 16.6.

The start of this reporting period has also been relatively solid, with just under 92% of the 23 companies that have posted quarterly earnings beating Street forecasts, well ahead of the long-term average of 65%. That said, some 78 companies have issued negative pre-announcements heading into the end of the quarter, compared to only 34 firms which guided investors to a positive surprise. 

Furthermore, while the U.S. and China agreed to hold off on tariff increases until the draft text of their Friday detente can be agreed, existing levies on more than $500 billion worth of goods from both sides are still in place, and global manufacturing indices are currently pegged at the weakest levels in a decade as a result of the lingering trade dispute.

In that respect, investors will undoubtedly focus on trade and tariff commentary from company executives following their third quarter updates.

"Until we get a deal that ends existing tariffs, 2020 earnings visibility will remain murky, especially in light of the ongoing weakness in the global growth outlook," said FTSE Russell's managing director of global markets Alec Young. "Both sides (in the trade dispute) are talking and that's a good thing, but for stocks to move much higher there's going to have to be more meat on the bones."