If I thought any of you had your mind on new small cap stock picks - or even a review of old ones - I'd probably continue talking about 'em. We're now getting into the thick of earnings season though, and that's where everybody's focus is. Since I'd rather give you something you're interested in than something you're not interested in, today we'll take a brutally honest look at earnings so far, and the financial sector's earnings in particular (where things are getting really messy). S&P 500 Q3 Earnings So Far, Projected First and foremost, though the expectation was adjusted much lower before the onset of earnings season, with roughly 15% of the S&P 500's stocks having posted Q3 results, the average large cap stock is expected to earn about 11.6% more than it did a year ago. Of the 33 names that have already reported, income - on average - was 9.7% better on a year-over-year basis. As of the last look, Standard & Poor's is looking for the S&P 500 to earn $24.07 (operating) per share for the third quarter. The good news is, that's a record Q3. The bad news is, that's less than Q2's $24.86. The mixed news is, a slowdown between Q2 and Q3 isn't actually all that unusual. Point being, this is not really cause for alarm yet. Yeah, the estimates are being reeled in for the rest of this year and through 2012, and stocks have sold off as a result. The punishment didn't fit the future crime though, and the ridiculously-steep selloff has now left the market at a rarely-seen P/E of 12.8... a screaming value. And despite the lowered forecasts, let's not lose sight of the fact that the S&P 500 IS producing record-breaking profits already, and is still expected to increase earnings into 2012. The recession worries and concerns of a new bear market (or that stocks are overvalued) are flat-out saying Standard & Poor's outlooks are wrong. Not that S&P is infallible, but in my experience they tend to know what they're doing more often than not. Now, if earnings slump again in Q4, then we may have a problem. We'll cross that bridge when we come to it though. Right now we need to worry about the rest if Q3's numbers. Anyway, while I wanted to show you the good, bad, and ugly of the current earnings trend and forecast, I also wanted to share with you a detail you're probably not going to get anywhere else about the financial sector's earnings, past and projected. Financial Sector's Q3 Earnings - Not What They Seem Remember a year ago or so when the financial sector's earnings increases were strong double-digit and triple-digit improvements? The sector's year-over-year-growth rates were so strong they made the entire market's earnings growth look phenomenal. Oh, we all knew it was skewed, but it was still fun. Well, guess what? The financial sector isn't carrying more than its fair share of weight anymore. In fact, it's carrying less. I told you above the S&P 500 was on pace for an 11.6% improvement in year-over-year earnings. If you take the financial sector out of the equation though, earnings are actually on pace to rise by 14.1%. The sector's only expected to pump up earnings by 6.6% for the third quarter. And just FYI, all those lowered growth estimates Standard & Poor's posted for the S&P 500 over the past three months? Half of that reduction (from 16.7% to 11.7%) is because of the drastically-lowered earnings outlook for the financials. HALF! Wait - it gets even more messed up than that. While the financials are walking into a disastrous Q3 earnings season, it's not like most of the financial stocks are struggling. Though the group is only expected to improve year-over-year bottom lines by 6.6%, if Goldman Sachs weren't in the picture, the sector would actually be poised to improve earnings by 11.0%... right in line with the market. [For reference, Goldman's Q3 EPS forecast started out at $3.26 and was whittled down to an expected loss of $0.05 per share.] Now, unlike the rest of the market, the financials aren't anywhere near the record earnings they were generating in 2007. Income is improving though, and is still expected to grow through 2012. Yeah, part of that is because of lowball comparisons to year-ago numbers (which were better than their prior-year comparisons, but still weak). On the flipside, the sector's still growing the bottom line despite the negative impact Goldman Sachs is having this quarter, and the hit Bank of America (BAC) took last quarter. Several of the big banks have seen their expectations lowered for Q3, but income for the group is only expected to fall 5.3% between the second and third quarter.... and that's with the Goldman effect. As it stands right now, the financial sector is trading at only 11.1 times its trailing earnings, which is about as cheap as you'll find these stocks as a group. Given what we know though, this is a case where sector-wide exposure is the wrong move, and cherry-picking individual stocks is the right one. The values are there if you can just get past train wrecks like Goldman. Anyway, I just wanted to take a break from small cap stuff today and share that with you, because I know most of the media isn't going to dive that deep. Their loss is your gain though, 'cause the money is in the details. No Recession Yet I still say we're not entering a recession, even if third quarter earnings fall short of the lowered earnings expectations. I'm planning on explaining part of that thesis tomorrow, so be sure to check your inbox then. In the meantime though, the site's got some new stuff you'll want to check out that isn't being delivered in the newsletter. 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