The third quarter earnings season is getting ready to kick off with most of the big banks reporting third quarter results within the next 10 days. Citigroup will get things started on October 11 and JPMorgan Chase will follow on October 15. The banks will get things started, with some big tech firms sitting in the on-deck circle.

Heading into the earnings season, analysts’ estimates are reflecting a decline in earnings for the S&P 500 as a whole. If the estimates are accurate, it would mean a decline of 4.1% according to FactSet.

“Earnings Growth: For Q3 2019, the estimated earnings decline for the S&P 500 is -4.1%. If -4.1% is the actual decline for the quarter, it will mark the first time the index has reported three straight quarters of year-over-year earnings declines since Q4 2015 through Q2 2016.”

All 11 sectors are expected to see declines in year over year earnings, but the energy sector, in particular, is expected to see big declines. The index members in the energy sector are expected to see earnings decline by an average of 17.5%. The materials sector is also expected to see a big decline with the average being 12.4%. Estimated declines are widespread in these sectors as well. For the energy sector, 89% of companies saw a decline in the Q3 estimates and 86% of materials sector stocks saw estimates ratcheted down.

Heading into the season, there have been 113 companies issue guidance with 82 issuing negative guidance and 31 issuing positive guidance. This puts the percentage of companies issuing negative guidance at 73% and that is above the five-year average of 70%. Two sectors, in particular, have seen a higher rate of negative guidance reports—technology and healthcare.

Looking at the last two quarters, we have seen small declines in earnings for the S&P 500 as a whole. In both instances, the estimates predicted bigger declines than what actually happened and that is probably what we will see again for this earnings season.

Even though the earnings have declined in each of the last two quarters, the S&P itself hasn’t declined. Sure we have seen dips in May and August, but since the end of the first quarter when the earnings reports would have started coming out, the S&P is up 3.0% through October 9.

Investors seem to be prepared for the earnings slowdown and have taken the reports in stride. When the earnings declined in the fourth quarter of 2015, the S&P fell over 10% before the index rallied again starting in the first quarter of 2016. At this time, analysts are predicting declines in earnings again for the fourth quarter, but earnings are expected to start growing again in the first quarter of 2020.

From a contrarian perspective, the fact that earnings are expected to decline could be a good thing. This means that investor expectations are relatively low and if we get more positive surprises when the actual results are released, we could see moves to the upside. Another factor that I have been noticing of late is a shift in sentiment for individual companies.

I write a lot of earnings previews on Seeking Alpha and I always include three sentiment indicators in my analysis—analysts’ ratings, short interest ratio, and put/call ratio. Over the last few weeks, it seems like the sentiment readings are creeping toward more pessimistic readings.

To give you an idea of what I am talking about, I wrote an article on JPMorgan Chase earlier today and I also wrote articles about the company in April and July. The analysts’ ratings haven’t changed very much, but the short interest ratio has moved from 1.48 to 2.0 to 2.2 currently. The put/call ratio has moved from 0.764 in April to 1.03 in July to 1.15 currently.

These moves in the short interest ratio and the put/call ratio are indicative of increasing pessimism toward the stock. The readings are below average compared to other stocks and indicate slightly more optimism compared to other stocks, but they are moving toward less optimism.

This is only one example, but I have seen it in tech stocks like Micron Technology and Broadcom as well.