In the midst of the coronavirus crisis, wall street analysts are raising their estimates going into earnings season for the first time in more than two years. but dont break out the bubbly just yet.

In aggregate, s&p 500 companies are projected to report a 21 per cent fall in earnings for the third quarter from the same period last year, according to data provider factset.

That is an improvement from the 25.3 per cent decline that had been projected at the beginning of summer. it is also a substantial improvement from the march to june quarter, when earnings per share plunged nearly 32 per cent. however, it would still mark the second largest year-on-year decline in quarterly earnings since the end of the financial crisis.

Overly grim initial estimates are part of the reason consensus forecasts have improved, but economic data also help justify these revisions. surveys of business owners have improved. retail spending increased in august for the fourth consecutive month, though the pace of growth cooled. consumer sentiment also reached its highest level in six months.

Analysts will be looking for signs in the earnings season that this data has translated into a better profit outlook to support current market valuations after a historic wall street recovery as coronavirus lockdowns eased and tech stocks surged.

Even after the s&p 500 slipped nearly 4 per cent in september, stocks in the index are trading on a valuation equivalent to 21.6 times forecast earnings for the next 12 months, well above the historical average of about 16.

To justify these valuations and support stocks, it does feel like we need to get some confirmation from this earnings season that companies are recovering along with the economy, jeff kleintop, chief global investment strategist at charles schwab, said.

Technology in particular will be closely watched because of the sectors spectacular run, with market gains concentrated in a handful of big companies.

Bar chart of eps growth (%) showing q3 earnings for the s&p 500 are projected to decline 21%

There are some analyst concerns that tech companies may struggle to meet lofty expectations because their business, which experienced less of a hit when lockdowns were imposed than other sectors, could see growth cool as the rest of the market recovers.

Tech companies on the s&p 500 are expected to report an earnings decline of 2.7 per cent in aggregate. if consensus predictions play out, that would make it the third-best performer of the 11 major sectors on the benchmark index.

Theyre the masters of surprise, said mike thompson of goldman sachs asset management. id be surprised if they didnt figure out how to swing that into low single-digit [growth] numbers, he added.

For the most part, however, third-quarter results still offer only a rear view mirror perspective. market sentiment is more likely to be dominated by uncertainty over the us presidential election arriving midway though reporting season, how soon a coronavirus treatment is developed and the size of future fiscal stimulus.

Dwindling hopes for even a limited stimulus deal to extend earlier support have raised doubts about the near 26 per cent eps growth that has been pencilled in for calendar year 2021.

The sheer magnitude of the initial stimulus had helped drive up household incomes and the savings rate as it eased the psychological toll for consumers who would otherwise have struggled to pay their bills.

The expiration of most previous aid programmes has left millions of americans on edge with a wave of job cuts coming. a handful of us companies including disney, exxonmobil and allstate last week announced tens of thousands of job cuts.

The us took a big bang approach to stimulus and that was a big driver of the recovery, says dan suzuki, deputy chief investment officer at richard bernstein advisors. it will be interesting to see how relative growth is impacted going forward if the us stimulus slows significantly more than the rest of the world...and whether that shows up in companies comments.

The big uncertainty for investors how the covid-19 pandemic evolves also overhangs everything.

The science of covid is getting better, but i fear the psychology of covid is getting worse, said rupal bhansali, chief investment officer at ariel investments. unless we see a change to that psychology, people are going to be very circumspect in spending and that just has implications for the economy and corporate profits.