Trouble in the financial sector has proven deeper than companies and Wall Street analysts had expected but the trouble isn't so deep to ruin what still remains a very upbeat outlook for U.S. corporate profits. With about two thirds of the earnings season in the books, year-on-year profits for the S&P 500 are down 17.9 percent for what will be the fourth straight quarter of year-on-year percentage decline, a run that follows an unprecedented string of 21 straight positive quarters. But even with the ongoing decline, it's important to remember that companies are still posting profits -- only less profits than prior quarters.

Even the financial sector, at an 85 percent year-on-year decline, is still posting a net profit, though very marginal. Outside of the financial sector, the run of profit growth would still be intact at 7.7 percent for the second quarter led by energy at roughly 25 percent and technology at 15 percent. Profit growth at industrial companies, benefiting from strong foreign markets, is rising at a respectable mid-single digit percentage trend while profits at consumer companies, hurt by weak domestic demand, are beginning to show year-on-year percentage declines. Data are provided through the courtesy of First Call.

The total rate of profit change, again at a preliminary -17.9 percent, is far weaker than companies and analysts had predicted this time last quarter when they were looking for only a 5 percent decline. But the disappointment, again centered squarely in the financial sector, has not darkened expectations for future profit growth, growth that is set to take off in the third quarter where estimates look for a 10.5 percent year-on-year gain followed by a spectacular 59 percent spike in the fourth quarter. These expectations of course are benefiting from easy comparisons with the declines of the third and fourth quarters of last year.

Share prices don't always move in lockstep with profit change, a surprise over the years to this observer who witnessed long lags in the stock market early on in the expansion at the same time that profit growth was in long acceleration. Share price appreciation hit a four-year peak last year at the same time that profits began to slow. Share prices continued to appreciate for three more straight quarters, gains that were not at all supported by underlying company profits. Share prices are currently on the retreat, again perhaps out of step with the outlook for profit growth.

Consumer confidence, loosely related to share prices and consumer spending, is at the very best just a little bit up from record or near record lows hit during the oil run-up of May and June. The Conference Board's report for July shows no better than stabilization in confidence but also shows further erosion in the assessment of the jobs market. The relationship between ongoing contraction in the jobs market, which so far has been only moderate, and overall contraction in profits is difficult to gauge. Companies have been paring back their workforces but perhaps not so drastically as to reduce their capacity for output. Should demand pick up, company productivity and company profits may very well benefit from leaner workforces, though leaner workforces are, to the say the least, not a positive for consumer confidence.

Talk of recession here is not a plus for foreign investment in U.S. equities. But foreigners have remained buyers of U.S. shares though recent data, posted in the monthly Treasury International Capital report, have been bumpy showing slowing gains and even a recent outflow. Yet foreign demand is rightly described as solid given profit deceleration along with depreciation in the dollar. The outlook for a resumption in profit growth along with stabilization in the dollar, the latter a possibility given increasingly hawkish inflation talk from the Federal Reserve, point to the possibility of increased demand from overseas.

First Call's efforts offer a special service to the nation's body of economic data. First Call researchers not only track actual profits for the S&P 500 but also Wall Street estimates of future profits, providing a unique and very timely data set that is often cited by policy makers. Below is a graph of quarterly profits as tracked by the Commerce Department with the latest data available for the first quarter. The results are a reminder that the nation's companies, despite the year-on-year percentage declines, continue to report profits, at an annual rate of more than $1.3 trillion in the category below.

Bottom line

But actual levels are less important when looking for inflection points in the business cycle where directional change is the key. The financial sector did trip a directional shift in total corporate profits but the overall outlook, however surprising and however much hurt by the financial sector, points to a directional pivot back up in the second half of the year.