US stocks posted their biggest gains of the year in the third quarter but their performance in the final three months could be swayed by earnings season which kicks off this week.

The S&P 500 is expected to clock its fifth straight quarterly earnings decline — its longest earnings recession since the financial crisis.

Earnings of companies listed on the S&P 500 are projected to fall 1 per cent, according to data provider S&P Global Markets Intelligence. Energy is once again expected to lead that decline, falling 69 per cent from a year ago as the crude prices remain more than 50 per cent below mid-2014 levels — when the protracted slump in crude first began.

Meanwhile, the consumer discretionary sector, which had boasted the strongest earnings growth in the first two quarters of 2016 is expected to report just a 2.2 per cent rise in EPS — the weakest advance since the second quarter of 2012 when the Federal Reserve unveiled QE3.

It isn’t just competition among retailers that is expected to pinch the bottom lines of companies in the consumer discretionary sector, strengthening expectations of a rate rise this year could also have prompted consumers to tighten their purse strings.

The materials sector is expected to beat out consumer discretionary for the strongest earnings gains. After posting earnings declines of 11.4 per cent and 4.2 per cent in the first six months of the year, it is expected to post earnings growth of 8.4 per cent.

And the freshly forged real estate sector — consisting of real estate investment trusts (Reits), which deliver any additional income to shareholders within a tax-efficient structure and real estate management and development companies is expected to log a 0.6 per cent drop in earnings.

However, investors should not be surprised if companies report better than expected results. Analysts set out low targets and often to revise their expectations lower as earnings season continues.

But there is a silver lining: revenues are projected to grow for the first time since the first quarter of 2015 and sales growth going forward could help revive profits.

US earnings season unofficially kicks off on Tuesday, when aluminium maker Alcoa reports results.

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