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Energy and Materials Will Ride High This Earnings Season... but 2012 is Another Story

The hottest sectors for the third-quarter earnings season, Energy and Materials, should stay on their winning streak through the next quarter, but will get hit by lagging demand from emerging markets in 2012.

The two sectors will report the best results in an earnings season expected to see overall profits by companies in the Standard and Poor's 500 Index rise by 12.6%, with Energy up 43% and Materials up 32%.

Demand for both should remain strong enough in the fourth quarter to give Energy a 25% pop and Materials a 22% jump. But after that, slowing activity in emerging economies, particularly China, will take its toll.

"If you look at the last few quarters, any time companies are talking about where they're seeing the largest growth in sales and earnings, it's typically been China, India, emerging markets," John Butters, senior earnings analyst at FactSet Research Systems Inc. (NYSE: FDS), told Yahoo! Finance. He said that a slowdown in demand would have an "impact on future expectations."

Just last week the price of such commodities as oil, copper and other metals fell when China reported that its trade surplus fell to $14.5 billion in September, down from $17.7 billion in August.

"The concern is that the European debt crisis is hampering the economy in China, and possibly in broader Asia," Bart Melek, head of commodity strategy with TD Securities, told The Wall Street Journal. Investors, he said, "think demand may drop."

Meanwhile, the International Energy Agency (IEA) cut its oil demand forecasts for 2012, though the organization still sees oil demand hitting a record this year.

3Q Earnings Season

Apart from Energy and Materials, the Consumer Discretionary Sector will also do well with 16% growth in the third quarter. The laggards this quarter will be the Utilities sector, which will see earnings fall 1%, Healthcare, which will eke out 2% growth and Consumer Staples, which will see 5% growth.

Yet the overall message is a positive one.

"Overall we are seeing fairly broad-based growth across the sectors," Butters told Yahoo! Finance. "Nine of the ten sectors are expecting growth on the earnings side and all 10 sectors are expecting growth on the revenue side."

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