AS THE HOUSING DEPRESSION

deepens and oil prices rise, Wall Street's worker bees continue to churn out honeyed earnings forecasts. Given what's been happening to

these days, some of them likely won't last long enough to be proven wrong.

It's a good thing so much of earnings analysis is bottom-up, because then there's no need to square it with news that doesn't specifically pertain to a particular company. The file marked "discard" fattened Wednesday with the addition of a 14-year low in housing starts, overshadowing news that September home and condo sales in Southern California were down 30% from August. Meanwhile, consumer prices are up 3.6% year-to-date, but merely 2.3% factoring out the 5.7% increase in the cost of food as well as the 11.7% energy spike, if any of this matters.

S&P 500 earnings are now set to stagnate in the third quarter, after a five-year profit boom. But the analysts who keep pollinating all those spreadsheets are counting on a flowering midwinter.

Fourth-quarter earnings are expected to be up 10.7% year-over-year, and the double-digit growth rate is forecast to persist throughout 2008. When I identify one of the sectors that's expected to lead this renaissance, you won't believe me. Nor should you.

The consumer discretionary group, led by such standard-bearers as Wal-Mart, Ford and five home builders, is expected to rebound from a 6% profit decline in Q3 to a 21% increase in Q4, followed by a 23% surge in 2008. Seeing as these companies live off whatever people don't spend on food and gas, this looks like exceptionally wishful thinking.

Some of this is just a calendar quirk. "The comparisons are starting to get easier for some of these industries that have been struggling, and that's a big part of it," says Thomson Financial earnings tracker John Butters. For example, he notes that the home builders are swinging from a cumulative $890 million gain a year ago to a $1.6 billion red-ink bath this time. That's a $2.5 billion swing from just five stocks. In the fourth quarter, this quintet is expected to lose $460 million, only a little more than in the fourth quarter of 2006.

But just because the earth takes a year to make a round trip doesn't mean that's the only span worth worrying about. The more telling contrast is between the middle of last year, when every report boasted of record that and record this, and the austere macro forecasts for the coming winter.

"The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year," Federal Reserve Chairman Ben Bernanke said Monday night. "The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth," chimed in Treasury Secretary Hank Paulson the next day.

Nor can we pretend any longer that the business bonanza overseas is a bottomless feeding trough. Citigroup expects consumer credit conditions to deteriorate for the balance of the year, a process that is already on the way not only in the U.S. but also in places like Britain and Mexico.

United Technologies is counting on "the U.S. economy to slow further in 2008," while avoiding a recession. Global growth is expected to brake as well. Orders at United Tech's Carrier unit have already cooled off, because empty homes don't require air conditioning.

"The international revenue thing we're thinking it's starting to get a little bit played out, so if companies aren't really beating estimates it's probably not going to be that good for the stocks because people are already expecting great things," says Justin Walters of Bespoke Investment Group. He's more upbeat on the likelihood that the best consumer names can outperform diminished expectations.

But it's the fourth-quarter guidance that will most affect this market, Walters points out. And I believe those projections will have to come down much more than they have thus far.

Given rising input, labor and credit costs, there's precious little headroom for profit margins to increase from historic highs. That leaves companies dependent on the weaker dollar to prop up revenue growth and on record buybacks to shrink share count, boosting earnings per share. And, of course, the Federal Reserve is lowering lending rates, a nice tailwind for those who are still able to borrow money.

Intel has profited handsomely from recent cost-cutting and the Vista launch, while cost-cutting alone carried the day for Yahoo. But hardware and software sales were soft at IBM}}, suggesting techs may have trouble doubling their profit growth rate to 20% in the fourth quarter.

And then there are the financials, whose apparent readiness to write off heavy losses here and now hasn't done much for the fourth-quarter earnings outlook. Their Q4 growth aim has slipped from 7% on Oct. 1 to 5% as of Oct. 12, not as fast as the concurrent slide in Q3 expectations from a 4% rise to a 9% decline. "That's a very rapid drop in the growth rate for a two-week time frame," says Butters. And financials are not just another group: They account for 20% of the value of the S&P 500 and for 27% of the index earnings, more than double the contribution of any other sector.

If this quarter is as bad as it gets, stocks should be zooming higher by all rights. But they're not, because things could get worse yet. And that should remain the case for quite some time.