Investors look for clues in earnings

— -- Investors will soon hear what companies, rather than economists, have to say about the economy's health.

Companies are on the verge of releasing earnings reports for the third quarter, and investors will be looking for signs of whether their worst fear is true: Profit predictions are too high given the economy's recent trouble.

Earnings reports will indicate whether companies are starting to feel the slowdown, or perhaps, economic indicators are painting an overly dour picture. "You have the world thinking we're going into a double-dip recession, and analysts expecting double-digit earnings growth," says Jack Ablin of Harris Private Bank. "I don't see how the two compute."

Investors are preparing to pick apart the earnings reports, unofficially kicked off by Alcoa on Oct. 11, to get an inside look at how companies are navigating the economy. Things to get the most attention include the:

•Magnitude of the earnings growth slowdown. Investors are bracing for the most significant downturn in earnings growth since the recovery started. Earnings are expected to grow 14.1% from the same period last year, down from 18.9% growth in the second quarter, says Standard & Poor's. Meanwhile, earnings are expected to fall 1% from the second quarter of 2011, the first decline in back-to-back quarterly earnings since the fourth quarter of 2009.

•Ability of companies to top expectations. If companies again beat analysts' forecasts, investors might get a shred of proof that the economic slowdown isn't hurting earnings as much as feared. Analysts have trimmed profit expectations for the quarter by only 3.4% since June, says Howard Silverblatt of S&P.

•Indications about the future. Guidance on the fourth quarter will be critical, as it will be the first full quarter affected by the economy's softness, Silverblatt says. Analysts have cut expectations for the quarter by only 2.3% since June. They expect 14% growth in 2012..

But investors are less optimistic. Stock prices imply that investors think earnings will fall 25% in 2012, Ablin says.

Investors are struggling to reconcile why analysts foresee such strong earnings with a "macro picture that is bloody ugly," says Dirk Van Dijk of Zacks Investment Research. Until earnings are actually out, "People are getting worried," he says.