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Investors have cheered largely better-than-expected company earnings in the third quarter, but those beats are masking an ugly truth, UBS investment bank equity strategists wrote in a note to clients Tuesday.

The big picture: "There is NO debate on S&P 500 forward earnings: a contraction appears imminent."

  • "Indeed, earnings expectations are already contracting in the S&P 400 Midcap and S&P 600 Smallcap indices. Meanwhile, forward earnings growth has slowed from a peak year-over-year growth rate of 23% in September of 2018 to less than 1% today."

Between the lines: There were only 68 companies in the S&P 500 with negative forward earnings at the beginning of the year but today 164 companies are predicting lower earnings — almost a third of the companies in the index.

  • "The most troubling part of all this is that it appears unlikely that the earnings picture will improve anytime soon."

Go deeper: The S&P 500 shuffle

Editor's note: This piece was clarified to show the equity strategists were from UBS investment bank (not UBS).

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