Margins Marching Higher - Earnings Trends

Key Points:

• 4Q earnings season off to strong start, with 206 of the S&P 500 reports in, median surprise of 4.28% and surprise ratio of 3.73 for EPS, 1.53% and 2.94 for revenues.
• Reported (206 firms) fourth quarter earnings growth of 31.2%, expected (294 firms) year-over-year growth of 19.5% for the vast majority of firms yet to report. On the Revenue side, 7.88% growth reported, but decline of 1.37% expected for those yet to report.
• Reported net margins (206 firms) rise to 10.95% from 9.00% a year ago, down from 11.21% in third quarter. Margins excluding Financials rise to 9.46% from 8.83% last year and 9.59% in third quarter.
• Net margins expected (294 firms) to expand to 7.31% (among yet to report) from 6.03% a year ago, and from 7.26% in third quarter. Excluding Financials, margins expected to rise to 6.77% from 6.43% a year ago, but down from 7.22% in the third quarter.
• Full-year total earnings for the S&P 500 expected to jump 43.3% in 2010, 14.7% further in 2011.  Growth to continue in 2012 with total net income expected to rise 12.0%
• Total revenues for the S&P 500 expected to rise 6.09% in 2010, 4.77% in 2011, and 4.89% in 2012. Excluding Financials, revenues expected to be up 8.99% in 2010, 5.97% in 2011 and 5.45% in 2012.
• Net Margins marching higher, from 5.88% in 2008 to 6.42% in 2009 to 8.67% expected for 2010, 9.50% expected for 2011 and 10.13% in 2012. Major source of earnings growth. Net margins ex-Financials 7.79% in 2008, 7.13% in 2009, 8.23% expected for 2010, 8.83% in 2011 and 9.39% in 2012.
• Revisions ratio for full S&P 500 at 1.98 for 2011, at 1.82 for 2012 -- both very bullish readings.  Ratio of firms with rising to falling mean estimates at 2.05 for 2011, 1.66 for 2012, also very positive readings. Total revisions activity expanding rapidly, making the revisions ratios more significant.
• S&P 500 earned $544.3 billion in 2009, expected to earn $782.9 billion in 2010, $898.1 billion in 2011. In 2012, the 500 are collectively expected to earn $1.0057 Trillion.
• S&P 500 earned $57.68 in 2009: $82.62 in 2010 and $94.77 in 2011 expected, bottom-up. For 2012, $106.17 expected in early read. Puts P/Es at 15.7x for 2010, and 13.7x for 2011 and 12.2x for 2012.

The 4th quarter earnings season is in full swing. We now have 206 or 41.2% of the S&P 500 reports in. However, the early reporting firms tend to be a bit bigger and more profitable than the stragglers, and those 206 firms actually represent 56.3% of the total expected net income.

That, of course, presupposes that all the remaining firms report exactly as expected, which is unlikely. But it shouldn't be too far off -- those 206 firms also represented 54.0% of all the net income a year ago.

The reports are encouraging, with total net income for those firms rising 31.2% over a year ago. The early median surprise of 4.28% is also fairly strong, although the ratio of positive-to-negative surprises is only somewhat above normal at just 3.73. Total net income of the reporting firms is 31.24% higher than a year ago, a slight slowdown from the 34.45% growth those same firms posted in the third quarter.

Big Earners Report First

It seems the higher growers reported early. The expectations are that the remaining 294 firms will post total net income that is just 19.45% higher than a year ago. That is an acceleration from the year-over-year growth of the third quarter (13.49%). It now looks like the final year-over-year growth will be 25.8% -- up from the implied level of 23.4% as of last week.

Given that positive earnings surprises almost always outnumber disappointments, that number implies that the remaining firms would have a median surprise of 0.00 and a surprise ratio of 1.00, which is highly unlikely. Thus growth will probably be well over to 25% again when all is said and done for the quarter. At the very start of earnings season, the expected growth was under 20%.

Revenues Slow

Revenue growth, though, is expected to slow down significantly, actually falling 1.37% -- down from positive growth of 8.91% in the third quarter. On the other hand, revenue growth among those that have reported is very healthy at 7.88%.

The financials are a big part of the overall revenue growth slowdown, but not the entire story. Excluding them, revenue growth is expected to slow to 2.71% year over year from 8.57% in the third quarter. That is in marked contrast to those that have already reported, where revenue growth is up from 7.17% growth in the third quarter.

Tougher year-over-year comparisons are a bigger part of the story. However, as I mentioned above, revenue surprises have been quite strong so far, with a median revenue surprise of 1.53%.

Net Margin Expansion

Thus, the stellar earnings growth is mostly due to the continued expansion of net margins. Much of the year-over-year margin expansion is due to the Financials, where the whole concept of revenues is a bit different from most companies, and thus the concept of net margins is also a bit different. Much of the earnings growth in the Financials has come from firms setting aside less for bad debts than they did last year.

One should be a bit on the doubtful side about the quality of those earnings, particularly in the absence of mark-to-market accounting. Among those that have reported, net margins are 10.95%, or 9.46% if one excludes the Financials, up from 9.00% (8.83% excluding financials) a year ago, but down from 11.21% (9.59% excluding Financials) in the third quarter.  The expected net margin for the remainder is 7.31% (6.77% excluding Financials) up from 6.03% (6.43% ex-Financials) last year.

Net margins continue to march northward, on a yearly basis. In 2008, overall net margins were just 5.88%, rising to 6.42% in 2009. They are expected to hit 8.67% in 2010 and continue climbing to 9.50% in 2011 and 10.13% in 2012. The pattern is a bit different -- particularly during the recession -- if the Financials are excluded, as margins fell from 7.78% in 2008 to 7.13% in 2009, but have started a robust recovery and are expected to be 8.23% in 2010, 8.83% in 2011 and 9.39% in 2012.

Full Year Expectations

The expectations for the full year are very healthy, with total net income for 2010 expected to rise to $782.9 billion in 2010, up from $544.3 billion in 2009. In 2011, the total net income for the S&P 500 should be $898.1 billion, or increases of 43.3% and 14.7%, respectively.

The early expectation is for 2012 to have total net income of just over the $1 Trillion mark. That will also put the “EPS” for the S&P 500 over the $100 “per share” level for the first time at $106.17. That is up from $57.68 for 2009, $82.62 for 2010 and $94.77 for 2011. In an environment where the 10-year T-note is yielding just 3.39%, a P/E of 15.7x based on 2010 and 13.7x based on 2011 earnings looks attractive.

With almost two 2011 estimates being raised for each one being cut (revisions ratio of 1.98), one has to feel confident that the current expectations for 2011 will be hit, and more likely exceeded. This provides a strong fundamental backing for the market to continue to move higher. The bullish argument is further boosted by such historical factors such as being in the third year of the presidential cycle (almost always the best of the four) and having a Democrat in the White House and the GOP at least partially in charge at the other end of Pennsylvania Ave.

While there is not a huge sample size of years with that political alignment, those that exist were very good ones for the stock market. Just having a Democrat in the White House has historically meant good things for the stock market. In fact, in the 50 years since JFK “asked not what your country can do for you,” the S&P 500 has advanced by a total of 1220 points (from 59.96 to 1280.26 on 1/20/11). Of those, more than all of them (1455) have come with a Democrat in the Oval Office (22 years), while the market has lost a total of 234 points with a GOP President. (Of course, a point gained under Kennedy or Nixon was a bigger percentage move than a point gained or lost under G.W. Bush or Obama).

Political Gridlock an Obstacle

On the other hand, there is a very real prospect of total political gridlock, which would greatly raise uncertainty about governmental policy and the strength of the economy that could undermine confidence. As Shakespeare said: “Beware the ides of March.” That is approximately when the U.S. will hit its current debt ceiling. If it is not raised, the U.S. Government could go into at least a technical default on its debt, and the Government would probably have to shut down (not immediately, as there are a few games that can be played, but if it were to last for more than a few weeks, shutdown and default is likely).

That is hardly something that will inspire confidence in the markets. While it is inconceivable that it will not eventually be passed, it is an opportunity for major political theater, and there is a chance that there will be a delay between the debt ceiling being hit and when it gets raised.

The economy does seem to have made a slow turn towards recovery. However, job creation remains very sluggish. Most of the real growth in the economy has come from higher productivity, not more hours being worked. Those productivity gains are accruing to capital, not labor and are a major reason behind the rising net margins, and resulting strong earnings growth.

Overall, Earnings a Major Positive

Still, companies are expected to continue growing their earnings nicely, and the 14.7% expected growth for 2011, if achieved, means that the total earnings for the S&P 500 should hit a new record by the middle of next year. The fact that analysts are, on balance, still raising estimates for 2011, increases the odds that that growth will be achieved.

Growth of 14.7% is not exactly awful. Even on the revenue side the expected growth in 2011 of 4.77%, or 5.97% if one excludes the Financial sector, is still pretty solid. Clearly the analytical community is not expecting the economy to turn south again.

Scorecard & Earnings Surprise

• So far, 206 of S&P 500 firms (41.2%) have reported -- that is a big enough sample to suggest this will be another strong earnings season.
• So far, so good. Median surprise of 4.28%, and a 3.73 surprise ratio (149 beats, 40 misses); 72.3% of all firms beat expectations.
• Positive year-over-year growth for 160, falling EPS for 46 firms, 3.48 ratio, 77.7% of all firms reporting have higher EPS than last year.
• Total net income up 31.2% among those that have reported.
• Materials and Conglomerates both have double-digit median surprises, Energy and Industrials also strong. Autos and Utilities in negative territory.

Historically, a “normal earnings season” will have a surprise ratio of about 3:1 and a median surprise of about 3.0%. Thus in the early going we are doing much better than average on the median front, and about average on the ratio front.

Early on, the ratios and medians can be very volatile, but it looks like an OK start to things. Pay attention to the percent reporting in evaluating the significance of the sector numbers.

Scorecard & Earnings Surprise 4Q Reported
Income Surprises	Yr/Yr Growth	% Reported	Surprise Median	EPS Surp Pos	EPS Surp Neg	# Grow Pos	# Grow Neg
Basic Materials	38.19%	52.17%	10.57	11	1	9	3
Conglomerates	7.58%	70.00%	10.29	6	0	5	2
Oils and Energy	30.55%	31.58%	9.17	9	3	10	2
Industrial Products	94.01%	60.00%	6.74	10	1	10	2
Construction	7.79%	36.36%	5.39	2	1	1	3
Consumer Discretionary	18.69%	27.27%	5.00	7	2	8	1
Computer and Tech	27.11%	60.00%	4.98	32	5	35	7
Finance	172.59%	51.28%	4.71	28	10	32	8
Business Service	2.18%	21.05%	3.68	3	0	3	1
Retail/Wholesale	13.43%	33.33%	3.41	9	5	13	2
Medical	5.04%	36.17%	3.33	14	2	13	4
Aerospace	-4.45%	70.00%	3.24	6	1	6	1
Consumer Staples	1.34%	23.68%	2.73	6	1	4	5
Transportation	24.59%	55.56%	0.00	2	2	4	1
Utilities	2.94%	20.93%	-1.82	3	5	6	3
Auto	-15.54%	33.33%	-18.46	1	1	1	1
S&P	31.24%	41.20%	4.28	149	40	160	46

Sales Surprises

• Sales Surprise ratio at 2.94, median surprise 1.53%, a very strong showing, 72.8% of all firms do better than expected on top line.
• Growing Revenues outnumber falling revenues by ratio of 3.38, 77.2% of firms have higher revenues than a year ago.
• Autos lead in sales surprise and trail in earnings surprise, Energy, Construction and Finance also posting better-than-expected top lines. Staples and Utilities disappoint.
• Revenue growth very healthy at 7.88% but still greatly lags earnings growth pointing to net margin expansion (see net margin tables below). Refer to the “% reported” column to assess the significance of individual sector information.

Sales Surprises
Sales Surprises	Yr/Yr Growth	% Reported	Surprise Median	Sales Surp Pos	Sales Surp Neg	# Grow Pos	# Grow Neg
Auto	-4.04%	33.33%	6.416	2	0	1	1
Oils and Energy	21.81%	31.58%	4.203	10	2	11	1
Construction	-3.62%	36.36%	2.938	2	2	1	3
Finance	-0.12%	51.28%	2.043	31	8	22	18
Conglomerates	3.98%	70.00%	1.995	7	0	6	1
Industrial Products	31.61%	60.00%	1.994	10	2	10	2
Basic Materials	15.93%	52.17%	1.745	10	2	12	0
Computer and Tech	23.01%	60.00%	1.557	31	11	38	4
Business Service	8.70%	21.05%	1.343	4	0	4	0
Transportation	14.68%	55.56%	1.274	3	2	5	0
Medical	-0.78%	36.17%	1.098	15	2	13	4
Consumer Discretionary	8.98%	27.27%	1.048	7	2	8	1
Aerospace	0.29%	70.00%	0.643	4	3	6	1
Retail/Wholesale	8.91%	33.33%	0.445	10	5	13	2
Utilities	0.57%	20.93%	-0.279	3	6	5	4
Consumer Staples	0.61%	23.68%	-0.643	4	5	4	5
S&P	7.88%	41.20%	1.53	153	52	159	47

Reported Quarterly Growth: Total Net Income

• The total net income is 61.24% above what was reported in the fourth quarter of 2009, down from 34.45% growth these same 206 firms reported in the third quarter. These firms expected to slow to 9.76% growth in the first quarter.
• Sequential earnings growth is 2.34%. Sequential decline of 3.40% expected for first quarter.
• Massive growth for Financials, mostly due to lower loss provisions; earnings quality questionable. Industrials, Materials and Energy all reporting over 30% growth.
• Autos and Aerospace post lower total net income than last year, six sectors positive, but only in single-digit growth.
• While 41.2% of the companies have reported, they represent 56.3% of all the expected net income, provided that the unreported all report in line with expectations. Projected final year-over-year growth of 25.8%.
• Refer back to the percent reporting in evaluating sector numbers, for many the expected growth table is still much more significant. For example, the Auto numbers are based on the results of only two companies.

Quarterly Growth: Total Net Income Reported
Income Growth	"Sequential Q1/Q4 E"	"Sequential Q4/Q3 A"	Year over Year 4Q 10 A	Year over Year 1Q 11 E	Year over Year 3Q 10 A
Finance	10.60%	-4.51%	172.59%	4.73%	60.30%
Industrial Products	-14.25%	1.38%	94.01%	59.78%	61.78%
Basic Materials	62.94%	16.10%	38.19%	15.82%	32.79%
Oils and Energy	8.49%	2.07%	30.55%	26.79%	46.49%
Computer and Tech	-23.18%	23.37%	27.11%	18.70%	51.00%
Transportation	-12.04%	-10.90%	24.59%	29.19%	67.96%
Consumer Discretionary	-6.94%	-38.19%	18.69%	6.64%	21.47%
Retail/Wholesale	11.93%	0.38%	13.43%	4.97%	16.25%
Construction	-25.63%	-39.19%	7.79%	-1.24%	1920.00%
Conglomerates	-12.96%	7.69%	7.58%	22.23%	8.13%
Medical	1.54%	-5.83%	5.04%	-3.02%	2.90%
Utilities	15.58%	-19.73%	2.94%	1.02%	5.04%
Business Service	19.53%	7.74%	2.18%	5.41%	0.63%
Consumer Staples	-15.72%	4.99%	1.34%	0.06%	1.42%
Aerospace	-20.52%	15.08%	-4.45%	6.01%	253.42%
Auto	45.26%	-32.57%	-15.54%	0.50%	97.87%
S&P	-3.40%	2.34%	31.24%	9.76%	34.45%

Expected Quarterly Growth: Total Net Income

• Total net income for the S&P 500 in the fourth quarter of 2010 (among those yet to report) is expected to rise 19.45% over fourth quarter of 2009 levels. Looks like the highest growers have already reported.
• Acceleration from the 13.49% growth those same firms had in the third quarter. A slowdown to 7.28% growth expected in the first quarter due to much more difficult comparisons.
• Finance and Conglomerates expected to post largest gains by a large margin. Eight other sectors expected to post double-digit gains, with Autos, Industrials, Transportation, Construction, Energy and Materials expecting gains of over 25%.
• Retail and Aerospace sectors expected to post lower total income than a year ago.
• Earnings are expected to be down 1.13% from what these same firms reported in the third quarter. Sequential rise of 3.72% expected for first quarter.

Quarterly Growth: Total Net Income Expected
Income Growth	Sequential Q1/Q4 E	Sequential Q4/Q3 E	Year over Year 4Q 10 E	Year over Year 1Q 11 E	Year over Year 3Q 10 A
Finance	-23.51%	20.15%	242.43%	-20.54%	-12.45%
Conglomerates	-38.42%	-21.83%	142.57%	-33.13%	-12.56%
Auto	-0.45%	19.87%	41.35%	80.48%	65.45%
Industrial Products	-1.10%	-8.88%	36.12%	10.36%	41.40%
Transportation	-14.11%	8.62%	35.51%	25.93%	60.14%
Construction	-11.31%	10.42%	33.16%	-3.82%	228.00%
Oils and Energy	8.42%	9.93%	29.32%	16.41%	29.44%
Basic Materials	20.55%	-8.36%	28.55%	57.88%	51.84%
Business Service	-6.78%	9.52%	16.28%	18.51%	18.96%
Medical	6.78%	-0.34%	11.78%	5.20%	21.20%
Computer and Tech	-1.78%	-6.79%	9.82%	-3.83%	35.19%
Consumer Staples	-1.36%	-13.99%	5.38%	4.18%	7.52%
Consumer Discretionary	-14.66%	5.93%	4.98%	-3.85%	14.16%
Utilities	29.16%	-37.50%	1.76%	-4.95%	6.81%
Aerospace	43.98%	-31.56%	-10.91%	11.72%	3.34%
Retail/Wholesale	43.15%	-2.13%	-27.69%	40.28%	-5.90%
S&P	3.72%	-1.13%	19.45%	7.28%	13.49%

Quarterly Growth: Total Revenues Reported

• Revenue growth very strong at 7.88%, up from the 7.17% growth the same firms posted in the third quarter.
• Sequentially revenues 4.70% higher than in the third quarter.
• Five sectors reporting double-digit revenue gains, four reporting revenue declines.
• Industrials, Tech and Energy posting revenue growth of over 20%, Materials and Transports also strong.
• Looking to first quarter, growth among these 206 firms expected to rise 2.81% year over year, and be down 4.76% sequentially.
• Revenue growth accelerates for seven sectors, slows from third quarter pace for nine sectors.

Quarterly Growth: Total Revenues Reported
Sales Growth	"Sequential Q1/Q4 E"	"Sequential Q4/Q3 A"	Year over Year 4Q 10 A	Year over Year 1Q 11 E	Year over Year 3Q 09 A
Industrial Products	3.46%	5.43%	31.61%	21.08%	29.25%
Computer and Tech	-9.89%	17.40%	23.01%	15.46%	24.05%
Oils and Energy	5.19%	6.32%	21.81%	12.65%	20.38%
Basic Materials	17.30%	1.73%	15.93%	13.29%	21.37%
Transportation	6.96%	0.61%	14.68%	10.95%	18.73%
Consumer Discretionary	4.00%	-4.91%	8.98%	5.84%	7.66%
Retail/Wholesale	-0.48%	1.05%	8.91%	7.06%	7.48%
Business Service	0.62%	5.33%	8.70%	8.77%	6.27%
Conglomerates	-8.11%	11.04%	3.98%	-0.98%	0.07%
Consumer Staples	-6.89%	4.51%	0.61%	-0.93%	0.73%
Utilities	2.30%	-5.64%	0.57%	1.99%	3.23%
Aerospace	-3.46%	5.15%	0.29%	2.89%	2.60%
Finance	-3.24%	-0.21%	-0.12%	-13.54%	-4.74%
Medical	0.06%	4.66%	-0.78%	4.01%	2.33%
Construction	17.38%	-6.18%	-3.62%	1.24%	-0.30%
Auto	-5.99%	7.95%	-4.04%	-5.41%	0.45%
S&P	-4.76%	4.70%	7.88%	2.81%	7.17%
Excluding Financials	-5.45%	5.62%	8.50%	2.88%	7.54%

Quarterly Growth: Total Revenues Expected

• Total revenue for the remaining S&P 500 firms seen falling 1.37%, down from 8.91% growth in the third quarter. Excluding Financials, revenues expected rise 2.71% year over year in the fourth quarter. Significant slowdown from the 8.57% growth posted in the third quarter.
• Four sectors expected to post lower revenues than a year ago, twelve higher. Revenue for the Financials is a major source of the revenue slowdown. Low interest rates depress interest income, which is a major part of financials revenue, but also reduce interest expense. As a result, revenues for Financials are notoriously flakey.
• Final year-over-year revenue growth now projected at 2.70%. So far, 46.2% of total expected revenues reported.
• The numbers on this table (and expected earnings and margin tables) exclude the results of all firms that have already reported. Week-to-week changes will reflect changes in the mix more than changes in the expectations for the remaining firms.

Quarterly Growth: Total Revenues Expected
Sales Growth	Sequential Q1/Q4 E	Sequential Q4/Q3 E	Year over Year 4Q 10 E	Year over Year 1Q 11 E	Year over Year 3Q 10 A
Auto	-0.36%	0.00%	16.21%	25.60%	20.73%
Industrial Products	-3.73%	2.33%	15.43%	1.99%	16.26%
Utilities	-10.53%	0.00%	14.60%	-8.14%	7.70%
Transportation	-5.16%	0.00%	11.02%	9.54%	14.25%
Oils and Energy	-0.07%	0.00%	9.97%	8.38%	13.70%
Basic Materials	1.06%	0.00%	8.87%	10.51%	14.23%
Computer and Tech	-0.10%	-0.56%	8.28%	6.28%	14.58%
Business Service	-5.17%	0.72%	6.09%	6.22%	7.43%
Medical	0.42%	-0.04%	4.71%	3.04%	12.16%
Consumer Discretionary	-9.52%	-0.89%	3.26%	3.57%	1.63%
Aerospace	-1.40%	0.00%	1.80%	3.10%	1.26%
Conglomerates	-9.14%	0.00%	0.54%	-2.03%	-3.11%
Construction	-5.88%	0.00%	-2.64%	5.49%	4.85%
Consumer Staples	-7.79%	0.21%	-3.64%	-4.63%	5.00%
Retail/Wholesale	10.88%	-11.02%	-8.20%	12.90%	2.63%
Finance	-11.43%	0.00%	-35.10%	-40.10%	11.76%
S&P 500	-0.50%	-2.67%	-1.37%	0.98%	8.91%
Excl Financials	0.34%	2.56%	2.71%	5.88%	8.57%

Quarterly Net Margins Reported

• Sector and S&P net margins are calculated as total net income for the sector divided by total revenues for the sector.
• Net margins for S&P 500 expand to 10.95% from 9.00% a year ago, but down from 11.21% in the third quarter. Net margins ex-Financials rise to 9.46% from 8.83% a year ago and from 9.59% in the third quarter.
• Twelve sectors post higher net margins than a year ago, huge margin expansion among the Financials as they slash bad debt provisions.
• Five sectors reporting double digit net margins, up from four a year ago, but down from six in the third quarter. Tech's margins the highest by a wide margin.
• Margin expansion the key driver behind earnings growth.

Quarterly: Net Margins Reported
Net Margins	Q1 2011 Estimated	Q4 2010 Reported	3Q 2010 Reported	2Q 2010 Reported	1Q 2010 Reported	4Q 2009 Reported
Computer and Tech	19.16%	21.49%	20.45%	19.87%	18.64%	20.80%
Consumer Staples	12.84%	13.85%	13.79%	11.66%	12.71%	13.75%
Medical	14.11%	13.70%	15.22%	14.91%	15.14%	12.94%
Finance	14.91%	13.03%	13.62%	13.46%	12.31%	4.78%
Business Service	13.79%	12.23%	11.96%	9.93%	14.23%	13.01%
Consumer Discretionary	9.39%	9.90%	15.24%	10.93%	9.32%	9.09%
Conglomerates	8.97%	8.88%	9.15%	9.06%	7.27%	8.58%
Transportation	7.80%	8.82%	9.96%	9.84%	6.70%	8.12%
Utilities	9.44%	8.49%	9.98%	9.58%	9.53%	8.29%
Industrial Products	6.72%	7.29%	7.58%	6.98%	5.09%	4.94%
Basic Materials	10.34%	7.15%	6.27%	8.54%	10.11%	6.00%
Aerospace	6.12%	7.01%	6.41%	6.85%	5.94%	7.36%
Oils and Energy	6.42%	5.64%	5.88%	6.31%	5.70%	5.27%
Retail/Wholesale	5.20%	4.80%	4.83%	4.58%	5.30%	4.61%
Auto	6.02%	3.72%	5.96%	6.96%	5.67%	4.23%
Construction	2.17%	2.82%	4.36%	5.25%	2.22%	2.52%
S&P 500	11.22%	10.95%	11.21%	11.02%	10.41%	9.00%
Excluding Fin'l	9.43%	9.46%	9.59%	9.25%	8.61%	8.83%

Quarterly Net Margins Expected

• Net margins expected to rise to 8.12% from 7.21% a year ago. Remaining firms expected to post lower net margins than those that have already reported.
• Final net margin expected to be 8.99%, up from 7.34% a year ago, but down from 9.02% in the third quarter.
• Sequentially margins expected to rise from 7.26% in the third quarter but rebound to 7.62% in the first quarter.
• Excluding financials, margins expected to rise to 6.77% from 6.43% last year but down from 7.22% in the third quarter.  Huge jump in Financial margins expected, moves from being year-ago laggard to expected gold medal position.
• Thirteen sectors expected to see year-over-year growth in margins, three to see declines.

Quarterly: Net Margins Expected
Net Margins	Q1 2011 Estimated	Q4 2010 Estimated	3Q 2010 Reported	2Q 2010 Reported	1Q 2010 Reported	4Q 2009 Reported
Finance	12.35%	14.30%	7.54%	8.79%	9.31%	2.71%
Business Service	12.43%	12.64%	12.14%	12.36%	11.14%	11.54%
Consumer Staples	10.66%	9.96%	11.12%	10.56%	9.75%	9.11%
Computer and Tech	9.61%	9.78%	10.62%	9.73%	10.62%	9.64%
Conglomerates	6.05%	8.93%	12.55%	2.32%	8.87%	3.70%
Consumer Discretionary	8.25%	8.75%	9.01%	8.77%	8.89%	8.60%
Oils and Energy	8.96%	8.26%	7.85%	8.95%	8.34%	7.02%
Industrial Products	8.02%	7.81%	8.25%	9.06%	7.41%	6.62%
Medical	7.72%	7.26%	7.45%	7.70%	7.56%	6.80%
Transportation	6.14%	6.78%	6.64%	6.09%	5.34%	5.55%
Basic Materials	6.83%	5.72%	6.28%	5.86%	4.78%	4.85%
Utilities	6.64%	4.60%	7.87%	6.63%	6.42%	5.18%
Auto	4.58%	4.58%	4.01%	3.90%	3.19%	3.77%
Aerospace	6.43%	4.40%	6.60%	6.56%	5.93%	5.03%
Retail/Wholesale	4.21%	3.26%	3.40%	3.78%	3.39%	4.14%
Construction	1.41%	1.50%	1.32%	2.77%	1.55%	1.10%
S&P 500	7.62%	7.31%	7.26%	7.45%	7.17%	6.03%
Excluding Fin'l	7.30%	6.77%	7.22%	7.29%	6.91%	6.43%

Annual Total Net Income Growth

• Following rise of just 1.54% in 2009, total earnings for the S&P 500 expected to jump 43.27% in 2010, 14.71% further in 2011.
• Early read of 2012 growth looking for 11.98% growth.
• All sectors but Aerospace expected to show total net income rise in 2011. All to show growth in 2012; eleven by double-digits in 2011.
• Cyclical sectors expected to lead in earnings growth again in 2011 and into 2012.

Annual Total Net Income Growth
Net Income Growth	2009	2010	2011	2012
Construction	- to -	- to +	175.01%	46.07%
Basic Materials	-49.90%	68.87%	32.12%	14.11%
Industrial Products	-38.63%	42.99%	26.28%	18.69%
Transportation	-30.14%	43.66%	20.93%	16.36%
Finance	- to +	317.82%	19.68%	11.03%
Oils and Energy	-55.27%	47.96%	18.80%	16.80%
Consumer Discretionary	-15.59%	19.96%	17.32%	16.80%
Computer and Tech	-4.13%	45.87%	16.92%	12.08%
Conglomerates	-23.83%	1.91%	16.78%	17.56%
Auto	- to +	2168.43%	16.11%	8.72%
Business Service	1.04%	14.74%	15.29%	14.33%
Consumer Staples	5.75%	11.08%	9.35%	9.97%
Retail/Wholesale	2.56%	14.47%	7.76%	11.13%
Utilities	-13.52%	-0.73%	6.19%	6.44%
Medical	2.21%	8.87%	5.76%	5.79%
Aerospace	-14.80%	18.85%	-0.02%	17.34%
S&P	1.54%	43.27%	14.71%	11.98%

Annual Total Revenue Growth

• Total S&P 500 Revenue in 2010 expected to be 6.09% above 2009 levels, just a partial rebound from 6.70% 2009 decline.
• Total revenues for the S&P 500 expected to rise 4.77% in 2011, 4.98% in 2012.
• Energy to lead revenue race in 2010 and continue lead in 2011 mostly due to higher commodity prices. Industrials, Materials, Transportation and Tech also expected to show high revenue growth.
• All sectors but Staples and Finance expected to show positive top-line growth in 2011, but five sectors expected to show positive growth below 5%.
• Financials the biggest drag on 2010 revenue growth, Aerospace the only other sector expected to post lower top line for the year. Revenues for Financials are notoriously flakey, low interest rates depress interest income (but also interest expense).
• Construction the only sector expected to post double-digit top-line growth in 2012, Business Service only sector expected to post falling revenues.
• Revenue growth significantly different if Financials are excluded, down 10.46% in 2009, but growth of 8.99% in 2010, 5.97% in 2011 and 5.45% in 2012.

Annual Total Revenue Growth
Sales Growth	2009	2010	2011	2012
Oils and Energy	-34.41%	20.76%	13.49%	7.08%
Industrial Products	-18.67%	13.58%	11.16%	8.96%
Basic Materials	-5.84%	12.58%	10.42%	5.53%
Transportation	-19.30%	10.91%	9.81%	8.25%
Computer and Tech	-13.65%	17.01%	9.15%	7.28%
Auto	-21.36%	5.15%	8.68%	8.04%
Consumer Discretionary	-10.05%	4.90%	6.75%	5.14%
Construction	-2.35%	0.57%	6.25%	10.75%
Business Service	-15.92%	5.68%	6.23%	-3.35%
Aerospace	6.30%	-0.81%	4.68%	6.16%
Medical	6.05%	8.74%	3.52%	2.89%
Retail/Wholesale	1.45%	4.51%	2.98%	5.21%
Utilities	-5.87%	4.13%	2.75%	3.24%
Conglomerates	-13.27%	0.78%	0.64%	5.47%
Consumer Staples	21.16%	3.77%	-2.74%	3.94%
Finance	-2.03%	-10.04%	-3.28%	1.50%
S&P	-6.70%	6.09%	4.77%	4.98%
Excluding Financials	-10.46%	8.99%	5.97%	5.45%

Annual Net Margins

• Net Margins marching higher, from 5.88% in 2008 to 6.42% in 2009 to 8.67% expected for 2010, 9.50% expected for 2011. Trend expected to continue into 2012 with net margins of 10.13% expected in early going. Major source of earnings growth.
• Financials significantly distort overall net margins. Net margins ex-Financials 7.78% in 2008, 7.13% in 2009, 8.23% expected for 2010, 8.83% in 2011. Expected to grow to 9.39% in 2012.
• Financials net margins soar from -8.42% in 2008 to 15.81% expected for 2012.
• All sectors but Utilities seeing higher net margins in 2010 than in 2009. All sectors but Aerospace expected to post higher net margins in 2011 than in 2010. Widespread margin expansion currently expected for 2012 as well with all sectors expected to post expansion in margins.
• Tech consistently the margin leader, Staples and Business Service also consistently have high net margins.
• Seven sectors to boast double digit net margins in 2012, up from just two in 2009.

Annual Net Margins
Net Margins	2009A	2010E	2011E	2012E
Computer and Tech	12.26%	15.29%	16.38%	17.11%
Finance	2.51%	11.68%	14.45%	15.81%
Business Service	11.11%	12.06%	13.09%	15.49%
Consumer Staples	9.94%	10.64%	11.97%	12.66%
Medical	9.72%	9.73%	9.94%	10.22%
Consumer Discretionary	7.72%	8.83%	9.71%	10.78%
Conglomerates	8.16%	8.25%	9.57%	10.67%
Transportation	5.87%	7.60%	8.37%	9.00%
Industrial Products	5.66%	7.13%	8.10%	8.83%
Oils and Energy	6.27%	7.68%	8.04%	8.77%
Basic Materials	4.47%	6.70%	8.02%	8.67%
Utilities	8.03%	7.65%	7.91%	8.16%
Aerospace	5.42%	6.50%	6.21%	6.86%
Auto	0.24%	5.28%	5.64%	5.68%
Retail/Wholesale	3.54%	3.88%	4.06%	4.29%
Construction	-0.10%	1.20%	3.10%	4.09%
S&P 500	6.42%	8.67%	9.50%	10.13%
Excluding Financials	7.13%	8.23%	8.83%	9.39%

Earnings Estimate Revisions: Current Fiscal Year
The Zacks Revisions Ratio: 2011

• Revisions ratio for full S&P 500 at 1.98, up from 1.91, a very bullish reading made even more so since it is due to new estimate increases coming into the sample, not old cuts falling out.
• Ten sectors with revisions ratios above 2.0, seven with ratios above 3.0.
• Thirteen sectors with positive revisions ratios, only two, Utilities and Staples below 1.0.
• Ratio of firms with rising to falling mean estimates at 2.05, up from 1.88, a very bullish reading.
• Total number of revisions (four-week total) passed seasonal low at 3,245, up from 2,245 last week (44.5%).
• Increases at 2,155 up from 1,471 (46.5%), cuts at 1,090, up from 771 (41.4%).

The Zacks Revisions Ratio: 2011
Sector	%Ch Curr Fiscal Yr Est - 4 wks	# Firms Up	# Firms Down	# Ests Up	# Ests Down	Revisions Ratio	Firms up/down
Auto	0.22	5	1	34	3	11.33	5.00
Aerospace	-0.34	7	3	35	4	8.75	2.33
Business Service	0.44	12	4	49	10	4.90	3.00
Industrial Products	1.41	14	4	64	15	4.27	3.50
Basic Materials	4.00	18	4	113	32	3.53	4.50
Computer and Tech	0.81	47	16	400	115	3.48	2.94
Transportation	0.46	7	2	72	21	3.43	3.50
Consumer Discretionary	0.57	21	9	135	48	2.81	2.33
Conglomerates	-1.06	7	2	24	9	2.67	3.50
Oils and Energy	1.78	32	7	317	133	2.38	4.57
Construction	-1.55	7	4	37	22	1.68	1.75
Medical	0.48	25	19	184	115	1.60	1.32
Retail/Wholesale	1.28	26	16	160	103	1.55	1.63
Finance	-0.62	48	27	408	310	1.32	1.78
Consumer Staples	-0.08	18	14	48	56	0.86	1.29
Utilities	-0.02	19	21	75	94	0.80	0.90
S&P	0.56	313	153	2155	1090	1.98	2.05

Earnings Estimate Revisions: Next Fiscal Year
The Zacks Revisions Ratio: 2012

• Revisions ratio for full S&P 500 at 1.82, down from 1.65 last week, in bullish territory.
• Nine sectors have at least two increases per cut, Autos, Transports and Industrials lead, other cyclicals also strong.
• Staples the only sector with negative revisions ratios (below 1.0), 15 with ratios above 1.0.
• Ratio of firms with rising estimate to falling mean estimates at 1.66, up from 1.48, in bullish territory.
• Total number of revisions (four-week total) at 2,303, up from 1,595 last week (44.3%).
• Increases at 1,487, up from 992 last week (49.9%), cuts rise to 816 from 603 last week (35.3%).

The Zacks Revisions Ratio: 2012
Sector	%Ch Next Fiscal Yr Est - 4 wks	# Firms Up	# Firms Down	# Ests Up	# Ests Down	Revisions Ratio	Firms up/down
Auto	2.23	4	2	27	2	13.50	2.00
Transportation	0.96	7	2	46	4	11.50	3.50
Industrial Products	1.29	14	5	54	8	6.75	2.80
Construction	2.24	8	3	27	5	5.40	2.67
Basic Materials	2.87	17	5	82	20	4.10	3.40
Computer and Tech	0.38	46	19	248	78	3.18	2.42
Business Service	-0.35	7	9	34	11	3.09	0.78
Conglomerates	0.16	6	3	25	11	2.27	2.00
Oils and Energy	2.66	30	9	197	96	2.05	3.33
Consumer Discretionary	1.04	19	11	82	42	1.95	1.73
Retail/Wholesale	-0.26	24	20	163	97	1.68	1.20
Medical	0.44	26	18	151	100	1.51	1.44
Utilities	0.05	22	18	70	57	1.23	1.22
Aerospace	0.21	5	4	28	23	1.22	1.25
Finance	-0.09	41	34	223	219	1.02	1.21
Consumer Staples	-0.03	16	14	30	43	0.70	1.14
S&P	0.62	292	176	1487	816	1.82	1.66

Total Income and Share

• S&P 500 earned $544.3 billion in 2009, expected to earn $782.9 billion in 2010, $898.1 billion in 2011.
• Early expectations that the S&P 500 total earnings will hit the $1 Trillion mark in 2012 at $1.005 Trillion.
• Finance share of total earnings moves from 5.9% in 2009 to 17.4% in 2010. Rise to 18.2% expected for 2011, retaking the earnings crown, but still well below 2007 peak of over 30%.  Energy share also rising going from 11.87% in 2009 to 13.24% in 2012.
• Medical share of total earnings far exceeds market cap share (index weight), but earnings share expected to shrink from 17.3% in 2009 to 11.4% in 2012, down each year.
• Market Cap shares of Construction, Staples, Retail, Transportation, Industrials and Business Service sectors far exceed earnings shares of any of the years from 2010 through 2012.
• Earnings shares of Energy, Finance and Medical well above market cap shares.
• As a general rule, one should try to overweight sectors with rising earnings shares, underweight falling earnings shares, but also over weight sectors where earnings shares exceed market cap shares.

Total Income and Share
Income ($ Bill)	Total Net Income $ 2010	Total Net Income $ 2011	Total Net Income $ 2012	% Total S&P Earn 2010	% Total S&P Earn 2011	% Total S&P Earn 2012	% Total S&P Mkt Cap
Finance	$136,254	$163,068	$181,061	17.40%	18.16%	18.00%	16.07%
Computer and Tech	$135,253	$158,132	$177,237	17.28%	17.61%	17.62%	18.81%
Oils and Energy	$95,935	$113,969	$133,117	12.25%	12.69%	13.24%	11.81%
Medical	$102,173	$108,060	$114,320	13.05%	12.03%	11.37%	9.92%
Consumer Staples	$63,032	$68,927	$75,800	8.05%	7.67%	7.54%	8.06%
Retail/Wholesale	$57,609	$62,077	$68,989	7.36%	6.91%	6.86%	8.26%
Utilities	$49,283	$52,335	$55,706	6.30%	5.83%	5.54%	5.95%
Consumer Discretionary	$26,696	$31,319	$36,581	3.41%	3.49%	3.64%	4.10%
Conglomerates	$26,724	$31,208	$36,687	3.41%	3.47%	3.65%	3.96%
Basic Materials	$22,735	$30,038	$34,276	2.90%	3.34%	3.41%	3.31%
Industrial Products	$15,423	$19,477	$23,118	1.97%	2.17%	2.30%	2.51%
Aerospace	$15,392	$15,389	$18,058	1.97%	1.71%	1.80%	1.66%
Business Service	$13,190	$15,207	$17,386	1.68%	1.69%	1.73%	1.95%
Transportation	$11,710	$14,161	$16,478	1.50%	1.58%	1.64%	1.90%
Auto	$10,611	$12,321	$13,395	1.36%	1.37%	1.33%	1.18%
Construction	$867	$2,384	$3,483	0.11%	0.27%	0.35%	0.54%
S&P 500	$782,886	$898,072	$1,005,690	100.00%	100.00%	100.00%	100.00%

P/E Ratios

• Trading at 15.7x 2010, 13.7x 2011 earnings, or earnings yields of 6.37% and 7.30%, respectively. Early 2012 P/E at 12.2x or earnings yield of 8.20%.
• Earnings Yields still attractive relative to 10-year T-Note rate of 3.45%, but less so than in recent months.
• Medical has lowest P/E based on 2010 and 2011, and 2012 earnings. Finance, Autos and Energy also have low P/E's on 2011 and 2012 earnings.
• Construction has highest P/E for all three years, but falling fast.
• Auto and Finance high 2009 P/E's to fall dramatically in 2010 and 2011, continue down in 2012.
• S&P 500 earned $57.68 in 2009: $82.62 in 2010 and $94.77 in 2011 expected. Early expectation for $106.17 for 2012.

P/E Ratios
P/E	2009	2010	2011	2012
Medical	13.0	12.0	11.3	10.7
Auto	310.9	13.7	11.8	10.9
Finance	60.7	14.5	12.1	10.9
Oils and Energy	22.4	15.2	12.8	10.9
Aerospace	15.7	13.2	13.2	11.3
Basic Materials	30.3	17.9	13.6	11.9
Utilities	14.7	14.9	14.0	13.1
Consumer Staples	17.5	15.8	14.4	13.1
Computer and Tech	25.0	17.1	14.6	13.1
Conglomerates	18.6	18.3	15.6	13.3
Business Service	20.9	18.2	15.8	13.8
Industrial Products	28.6	20.0	15.8	13.3
Consumer Discretionary	22.7	18.9	16.1	13.8
Retail/Wholesale	20.2	17.7	16.4	14.7
Transportation	28.7	20.0	16.5	14.2
Construction	NM	76.8	27.9	19.1
S&P 500	22.5	15.7	13.7	12.2

Biggest FY1 Revisions

The first table below shows the S&P 500 firms with the biggest increases in their FY1 (mostly 2010) mean estimate over the last four weeks. The second shows the largest declines. To qualify there must be more than three estimates for FY1, and have a mean estimate of more than $0.50.

In addition to the change in the mean estimate, the net percentage of estimates being raised is shown for both FY1 and FY2, as well as the P/E ratios based on each year's earnings is shown.

Note that estimate momentum and value are not mutually exclusive. The most interesting of these firms will be where the net revisions percentage (#up-#dn/Tot) is more than 0.50 but less than 1.00. Big mean estimate changes based on a handful of individual revisions are suspect, but could prove to be the most interesting if other analysts follow suit.

On the other hand, if all the analysts have raised their estimates already, the mean estimate is less likely to rise again over the next month.

Largest Increases

Biggest FY1 Revisions(Largest Increases)
Company	Ticker	%Ch Curr Fiscal Yr Est - 4 wks	%Ch Next Fiscal Yr Est - 4 wks	# Up-Dn/Tot %Ch Curr Fiscal Yr Est - 4 wks	# Up-Dn/Tot %Ch Next Fiscal Yr Est - 4 wks	P/E using Curr FY Est	P/E using Next FY Est
Utd States Stl	X	21.65%	9.15%	0.50	0.50	17.02	10.42
Alcoa Inc	AA	20.68%	12.47%	0.44	0.47	12.10	10.39
Western Digital	WDC	14.27%	7.41%	0.64	0.38	10.62	8.43
Apple Inc	AAPL	13.45%	11.61%	0.75	0.55	14.94	13.06
Freept Mc Cop-B	FCX	11.51%	20.39%	0.35	0.27	9.23	8.83
Wynn Resrts Ltd	WYNN	11.29%	17.31%	0.52	0.53	43.56	32.21
Forest Labs A	FRX	10.78%	4.83%	0.82	0.76	7.35	7.19
Marathon Oil Cp	MRO	10.14%	5.95%	0.68	0.36	8.85	8.02
Intel Corp	INTC	9.10%	8.06%	0.88	0.29	9.79	9.35
Newmont Mining	NEM	8.75%	15.09%	0.47	0.57	10.92	10.54
Consol Energy	CNX	8.43%	-0.55%	0.62	0.11	16.11	10.77
Anadarko Petrol	APC	8.17%	5.02%	0.28	0.30	34.20	22.91
Nvidia Corp	NVDA	7.40%	20.61%	0.38	0.67	36.38	25.31
Cf Indus Hldgs	CF	7.26%	0.27%	0.20	0.17	10.74	11.71

Largest Declines

Biggest FY1 Revisions(Largest Declines)
Company	Ticker	%Ch Curr Fiscal Yr Est - 4 wks	%Ch Next Fiscal Yr Est - 4 wks	# Up-Dn/Tot %Ch Curr Fiscal Yr Est - 4 wks	# Up-Dn/Tot %Ch Next Fiscal Yr Est - 4 wks	P/E using Curr FY Est	P/E using Next FY Est
Micron Tech	MU	-39.16%	-6.25%	-0.75	-0.32	16.92	8.87
Hudson City Bcp	HCBK	-17.07%	-15.61%	-0.87	-0.38	14.64	13.20
Noble Corp	NE	-12.68%	-6.32%	-0.44	-0.38	12.21	8.56
Supervalu Inc	SVU	-12.50%	-16.47%	-1.00	-0.73	5.68	5.94
Block H & R	HRB	-6.86%	-5.31%	-0.80	-0.80	9.22	8.05
Goodyear Tire	GT	-6.73%	-1.47%	-0.09	-0.17	9.29	6.09
Southwestrn Ene	SWN	-5.08%	-4.64%	-0.22	-0.24	23.31	16.96
Goldman Sachs	GS	-3.47%	-2.90%	-0.35	-0.12	9.66	8.68
Hasbro Inc	HAS	-3.31%	-1.21%	-0.60	-0.45	14.35	12.20
Clorox Co	CLX	-3.28%	-2.91%	-0.67	-0.65	15.97	14.28
Eqt Corp	EQT	-3.13%	-8.37%	-0.13	0.08	25.83	19.16
Harman Intl Ind	HAR	-3.12%	-3.91%	-0.20	-0.20	25.42	17.31

Data in this report, unless stated otherwise, is through the close on Thursday 1/27/2011.

We use the convention of referring to the next full fiscal year to be completed as 2010, not all firms are on December fiscal years, this can cause discontinuities in the data, particularly around this time of year. The data is based on FY1, not based on 2011, even though I may call it 2011 in the report.

All numbers, including historical ones, reflect the current composition of the S&P 500, thus some historical numbers may differ from those reported by S&P which are based on the composition of the index at the time of the reports.
 
ALCOA INC (AA): Free Stock Analysis Report
 
APPLE INC (AAPL): Free Stock Analysis Report
 
FREEPT MC COP-B (FCX): Free Stock Analysis Report
 
WESTERN DIGITAL (WDC): Free Stock Analysis Report
 
UTD STATES STL (X): Free Stock Analysis Report
 
Zacks Investment Research