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If it wasn't for the banks and resources sector, the reporting season might not look so bad.
But thanks mainly to falling commodity prices, the top listed companies are expected to report a drop in earnings per share growth for the second consecutive year for the first time since the global financial crisis.
According to market consensus, the overall earnings for the 2016 financial year are likely to show a 10 per cent decline that comes after EPS growth fell 5 per cent in 2015.
That's the worst back-to-back fall since 2009 (when EPS was down 20 per cent) and 2008 (when it dropped 8 per cent).
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But again this time round, just like 2015, most of the fall is due to the resources sector.
Excluding the 51 per cent fall in resources, earnings in 2016 for the overall market is tipped to be down 0.5 per cent.
Indeed, the outlook for resources in 2017 is getting better thanks to the rise in the iron ore price. But in the short term the banks and consumer staple sector will continue to act as a handbrake on any earnings growth.
This reporting season investors will continue to look for any signs that bad and doubtful debts are getting worse for the banks. Net interest margins, dividends and any capital raisings are also key factors.
Relief rally possible
If there is anything in the banks' favour, it is they have not performed well, implying a relief rally might be on the cards if Commonwealth Bank, the only bank to report this season on August, 10, sets the right tone.
According to UBS, the CBA report should show good volume growth, weak fee income, some moderate margin pressure along with a moderate rise in bad debt provisions and a flattish dividend.
The other three major banks report quarterly updates while the Bendigo and Adelaide Bank has a full-year profit to deliver.
Since July 1, 2015, the major S&P; ASX 200 index is up just 2 per cent, while the banking sector is down 12 per cent.
The industrials sector over that time frame has jumped 22 per cent and, once investors take away the large cap stocks that dominate the index (the banks, Woolworths, Rio Tinto, BHP Billiton and Telstra), the picture doesn't look so bad for a raft of stocks.
The problem is those stocks have done well in the lead up to this season, implying if they don't meet or beat expectations then investors will treat them harshly.
Making matters worse is the valuation those industrial stocks are now trading on.
High price-to-earnings ratio
Numbers collated by Morgan Stanley show the industrial sector of the benchmark index is trading on a forward price-to-earnings ratio of 19.6 times earnings, well above its long-term average of closer to 14 times.
Indeed, the forward PE of the major index has also expanded to 16.3 times earnings from 15.7 times in a matter of weeks since the surprise Brexit vote sparked a sell off.
The lure of another rate cut by the Reserve Bank next week along with the promise of more stimulus from global central banks has also helped spark the turnaround.
Given the long-term average of the PE is closer to 14.5 times, it implies the market could be at risk if the earnings side doesn't match the gains made in the price.
Of course with interest rates so low, there's a theory that says stock market PEs can run a lot higher before it's time to start dumping stocks.
As always, there will be winners and losers this reporting season.
According to UBS, there's a number of stocks that could surprise investors with some better-than-expected news. They include homewares group Adairs on the back of better sales, Harvey Norman on the dividend front thanks to its better cash flow, data centre provider NEXTDC with its better margins, Orora on the back of its domestic fibre division, cost cutting from Pact Group Holdings, SkyCity Entertainment as the Auckland economy did well, Star Entertainment, Tabcorp Holdings and Webjet.
On the flipside, the broker said the companies that might disappoint investors with some bad news include Coca Cola Amatil, Cochlear, CSL, Insurance Australia Group, Invocare, Monadelphous Group, Navitas, Sims Metal Management and Woolworths.