A Good Start to Earnings Season - Earnings Trends

Key Points:

• 4Q earnings season off to great start, but still very early, with just 81 of S&P 500 firms having reported. Median surprise of 6.56% and surprise ratio of 3.69 for EPS, 1.50% and 3.47 for revenues.
• Reported (81 firms) fourth quarter earnings growth of 63.3%, expected (419 firms) year-over-year growth of 12.3% for the vast majority of firms yet to report. On Revenue side, 7.54% growth reported, but just 2.5% expected for those yet to report. Slowdown from the 20.2% earnings and 8.85% revenue growth those firms reported in the 3rd quarter.
• Reported net margins (81 firms) rise to 11.97% from 7.88% a year ago, 11.71% in third quarter. Margins excluding financials rise to 11.56% from 9.93% last year and 10.69% in third quarter.
• Net margins expected (419 firms) to expand to 8.12% (among those yet to report) from 7.88% a year ago, but down from 8.37% in third quarter. Excluding financials, margins expected to rise to 7.72% from 7.56% a year ago, but down from 8.36% in the third quarter.
• Full-year total earnings for the S&P 500 expected to jump 43.2% in 2010, 15.9% further in 2011. Growth to continue in 2012 with total net income expected to rise 10.4%.
• Total revenues for the S&P 500 expected to rise 4.56% in 2010, 5.36% in 2011, and 4.82% in 2012. Excluding financials, revenues expected to be up 8.56% in 2010, 6.09% in 2011 and 5.32% in 2012.
• Net margins marching higher, from 5.88% in 2008 to 6.42% in 2009 to 8.80% expected for 2010, 9.68% expected for 2011 and 10.19% in 2012. A major source of earnings growth. Net margins ex-financials 7.79% in 2008, 7.13% in 2009, 8.25% expected for 2010, 8.93% in 2011 and 9.36% in 2012.
• Revisions ratio for full S&P 500 at 1.91 for 2011, at 1.65 for 2012, both bullish readings. Ratio of firms with rising to falling mean estimates at 1.65 for 2011, 1.48 for 2012, also positive readings. Total revisions activity past seasonal lows and is expanding rapidly.
• S&P 500 earned $544.3 billion in 2009, expected to earn $782.6 billion in 2010, $907.0 billion in 2011. In 2012, the 500 are collectively expected to earn $1.001 Trillion.
• S&P 500 earned $57.67 in 2009: $82.60 in 2010 and $95.54 in 2011 expected bottom up. For 2012, $105.81 expected (in an early read). Puts P/Es at 15.5x for 2010, and 13.4x for 2011 and 12.1x for 2012.

The 4th quarter earnings season is now in full swing. It is still on the early side, with just 81, or 16.2%, of the S&P 500 reports in. However, history does suggest that by the time you have about 15% of the sample, you can have a pretty good feel for how the rest of the earning season will go.

The early reports are encouraging, with total net income for those firms rising a stunning 63.3% over a year ago. The early median surprise of 6.56% is also quite strong, although the ratio of positive to negative surprises is only somewhat above normal at just 3.69. However, those numbers are always extremely volatile in the early going.

Most of the focus should be on the expectations for those who have yet to report. It seems pretty clear that we got a big batch of the highest growers out of the way early. The expectations are that the remaining 419 of the S&P 500 firms will post total net income that is just 12.26% than a year ago. That is a slowdown from the year over year growth of the third quarter (20.2%).

The firms that have reported are somewhat bigger/more profitable than those that have yet to report, on average. If all the remaining firms were to report exactly as expected, then 27.4% of the total earnings expected for the quarter are in. The implied total growth is 23.4%. Given that positive earnings surprises almost always outnumber disappointments, one does not need an overly active imagination to envision that growth will be over to 25% again when all is said and done for the quarter.

Revenue Growth Expected to Fall

Revenue growth, though, is expected to slow down significantly, actually falling 0.33% from positive growth of 9.01% in the third quarter. On the other hand, revenue growth among those companies that have reported is very healthy at 7.54%.

The financials are a big part of the overall revenue growth slowdown, but not the entire story. They are also somewhat over-represented in the early going, responsible for 34.8% of all the net income reported so far. Excluding them, revenue growth is expected to slow to 2.50% year over year from 8.85%.

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 1.50%.

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 11.97%, or 11.56% if one excludes the financials, up from 7.88% (9.93% excluding financials) a year ago, and 11.71% (10.69% excluding financials) in the third quarter. The expected net margin for the remainder is 8.12% (7.72% excluding financials) up from 7.21% (7.56% 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 8.80% in 2010 and continue climbing to 9.68% in 2011 and 10.19% 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 8.25% in 2010, 8.93% in 2011 and 9.36% in 2012.

Full-Year Expectations and Beyond

The expectations for the full year are very healthy, with total net income for 2010 expected to rise to $782.6 billion in 2010, up from $544.3 billion in 2009. In 2011, the total net income for the S&P 500 should be $907.0 billion, or increases of 43.2% and 15.9%, 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 $105.81. That is up from $57.67 for 2009, $82.60 for 2010, and $95.54 for 2011. In an environment where the 10-year T-note is yielding just 3.45%, a P/E of 15.5x based on 2010 and 13.4x based on 2011 earnings looks attractive.

With almost two 2011 estimates being raised for each one being cut (revisions ratio of 1.91), 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.

Historical/Political Factors

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.

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 the debt ceiling is not raised, the U.S. government would go into at least a technical default on its debt, and the government would probably have to shut down. That is hardly something that will inspire confidence in the markets. And while it is inconceivable that a higher debt ceiling 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 (Slow) Road to Recovery

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 strong earnings growth.

Still, companies are expected to continue growing their earnings nicely, and the 15.9% 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 15.9% is not exactly awful. Even on the revenue side the expected growth in 2011 of 5.36%, or 6.09% 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

• Only 81 of S&P 500 firms (16.2%) have reported, but that is a big enough sample to suggest this will be another strong earnings season.
• Off to a good start with a median surprise of 6.56%, and a 3.69 surprise ratio (59 beats, 16 misses), 72.8% of all firms beat expectations.
• Positive year-over-year growth for 68, falling EPS for 13 firms -- a 5.23 ratio, 84.0% of all firms reporting have higher EPS than last year.
• Total net income up 63.3% among those that have reported.
• Six sectors have only a single report in, pay attention to the percent reported when evaluating sector data.

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
Construction	- to +	9.09%	466.67	1	0	1	0
Medical	17.77%	6.38%	33.63	3	0	3	0
Conglomerates	17.28%	10.00%	12.50	1	0	1	0
Basic Materials	57.03%	26.09%	10.57	6	0	6	0
Oils and Energy	42.47%	2.63%	10.39	1	0	1	0
Aerospace	25.83%	10.00%	10.34	1	0	1	0
Computer and Tech	37.59%	22.86%	9.86	14	1	15	1
Consumer Discretionary	16.03%	12.12%	8.93	3	1	3	1
Industrial Products	73.33%	10.00%	7.51	2	0	1	1
Business Service	6.35%	5.26%	5.71	1	0	1	0
Finance	201.90%	33.33%	3.84	17	7	21	5
Retail/Wholesale	13.31%	24.44%	2.90	6	4	9	2
Auto	30.21%	16.67%	1.85	1	0	1	0
Consumer Staples	-2.98%	7.89%	0.00	1	1	1	2
Transportation	20.93%	33.33%	0.00	1	1	2	1
Utilities	6.91%	2.33%	-2.86	0	1	1	0
S&P	63.29%	16.20%	6.56	59	16	68	13

Sales Surprises

• Sales Surprise ratio at 3.47, median surprise 1.499% -- a very strong showing; 72.8% of all firms do better than expected on top line.
• Growing Revenues outnumber falling revenues by ratio of 2.52, 71.6% of firms have higher revenues than a year ago.
• Revenue growth very healthy at 7.54% but still greatly lags earnings growth, pointing to net margin expansion (see net margin tables below). Still very early, so take numbers (especially at the sector level) with a grain of salt.

Sales Surprises
Sales Surprises	Yr/Yr Growth	% Reported	Surprise Median	Sales Surp Pos	Sales Surp Neg	# Grow Pos	# Grow Neg
Construction	-5.91%	9.09%	10.476	1	0	0	1
Auto	13.43%	16.67%	6.66	1	0	1	0
Industrial Products	17.41%	10.00%	3.575	2	0	2	0
Medical	10.24%	6.38%	3.249	3	0	3	0
Consumer Discretionary	7.79%	12.12%	2.476	3	1	3	1
Finance	-1.77%	33.33%	2.043	17	4	13	13
Basic Materials	10.67%	26.09%	1.875	6	0	6	0
Computer and Tech	26.09%	22.86%	1.596	12	4	15	1
Oils and Energy	57.85%	2.63%	1.356	1	0	1	0
Transportation	13.90%	33.33%	1.274	2	1	3	0
Aerospace	8.08%	10.00%	0.643	1	0	1	0
Retail/Wholesale	5.32%	24.44%	0.548	8	3	9	2
Business Service	3.02%	5.26%	0.277	1	0	1	0
Utilities	-4.06%	2.33%	-0.114	0	1	0	1
Consumer Staples	-0.55%	7.89%	-1.085	1	2	0	3
Conglomerates	-0.15%	10.00%	-4.747	0	1	0	1
S&P	7.54%	16.20%	1.499	59	17	58	23

Reported Quarterly Growth: Total Net Income

• The total net income is 63.29% above what was reported in the fourth quarter of 2009, up from 41.53% growth these same 81 firms reported in the third quarter. These firms expected to slow to 10.19% growth in the first quarter.
• Sequential earnings growth is 5.73%. Sequential decline of 3.36% expected for first quarter.
• Seven sectors reporting over 30% growth, including Construction going from a loss to a profit.
• Only Staples reporting lower total earnings than last year; Utilities and Business Services alone in single digits.
• Refer back to the percent reporting in evaluating sector numbers; for many, the expected growth table is still much more significant.

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
Construction	-127.46%	6.67%	- to +	-25.52%	181.08%
Finance	15.72%	-7.50%	201.90%	-0.86%	56.58%
Industrial Products	-1.04%	-7.14%	73.33%	39.42%	121.58%
Basic Materials	30.98%	27.20%	57.03%	13.62%	24.03%
Oils and Energy	-2.01%	33.03%	42.47%	52.69%	11.18%
Computer and Tech	-23.17%	28.13%	37.59%	22.06%	48.25%
Auto	-2.53%	-8.31%	30.21%	33.40%	36.33%
Aerospace	-1.81%	0.67%	25.83%	0.18%	1.35%
Transportation	-10.65%	-13.30%	20.93%	34.53%	87.66%
Medical	-11.89%	-6.00%	17.77%	-10.57%	21.41%
Conglomerates	-21.38%	24.37%	17.28%	32.33%	5.83%
Consumer Discretionary	-19.40%	-52.97%	16.03%	-5.94%	18.18%
Retail/Wholesale	32.05%	-3.56%	13.31%	3.66%	16.78%
Utilities	45.27%	-45.97%	6.91%	9.36%	16.61%
Business Service	-6.34%	1.52%	6.35%	2.03%	6.45%
Consumer Staples	-26.75%	22.79%	-2.98%	4.15%	-4.57%
S&P	-3.36%	5.73%	63.29%	10.19%	41.53%

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 12.26% over fourth quarter of 2009 levels. Looks like the highest growers have already reported.
• Slowdown from the 20.16% growth those same firms had in the third quarter. A further slowdown to 8.18% growth expected in the first quarter due to much more difficult comparisons.
• Finance expected to post largest gains by a large margin. Six other sectors expected to post double-digit gains, with Industrials, Transportation and Energy expecting gains of over 25%.
• Five sectors expected to post lower total income than a year ago.
• Earnings are expected to be down 4.26% from what these same firms reported in the third quarter. Sequential rise of 4.37% 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	-18.00%	14.72%	174.87%	-9.57%	0.70%
Industrial Products	13.84%	-15.85%	41.68%	43.00%	48.34%
Transportation	-12.25%	1.51%	32.90%	26.42%	52.94%
Oils and Energy	8.25%	6.09%	28.40%	16.52%	35.03%
Business Service	-12.42%	13.53%	18.50%	9.02%	15.95%
Basic Materials	53.97%	-10.93%	18.41%	42.76%	54.21%
Auto	8.52%	-7.10%	12.60%	5.50%	104.32%
Consumer Discretionary	-12.47%	4.72%	6.47%	-1.87%	16.20%
Medical	9.62%	-6.57%	3.75%	2.10%	10.33%
Computer and Tech	-5.37%	-2.53%	3.11%	6.89%	43.64%
Utilities	23.05%	-28.48%	1.47%	-0.56%	6.13%
Consumer Staples	-3.71%	-12.36%	-0.07%	0.77%	5.78%
Construction	-8.86%	-23.81%	-7.71%	-5.47%	465.28%
Aerospace	-6.12%	0.14%	-11.94%	9.13%	159.27%
Conglomerates	23.08%	-26.15%	-14.73%	16.33%	6.47%
Retail/Wholesale	27.52%	1.42%	-20.75%	32.56%	8.74%
S&P	4.37%	-4.26%	12.26%	8.18%	20.16%

Quarterly Growth: Total Revenues Reported

• Early Revenue growth very strong at 7.54%, up from the 4.77% growth the same firms posted in the third quarter.
• Sequentially revenues 3.40% higher than in the third quarter.
• Seven sectors reporting double-digit revenue gains, five reporting revenue declines.
• Energy, Tech and Industrials in the early lead.
• Looking to first quarter, growth among these 81 firms expected to decline 0.62% year over year, and be down 3.30% sequentially.
• Still a very thin sample, especially at the individual sector level.

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
Oils and Energy	1.50%	32.46%	57.85%	59.40%	26.06%
Computer and Tech	-9.29%	16.29%	26.09%	18.56%	27.17%
Industrial Products	3.97%	1.36%	17.41%	9.61%	19.94%
Transportation	6.58%	0.58%	13.90%	10.91%	18.90%
Auto	-1.90%	5.50%	13.43%	8.67%	14.91%
Basic Materials	12.05%	3.24%	10.67%	14.52%	13.63%
Medical	2.97%	1.77%	10.24%	7.11%	8.95%
Aerospace	14.14%	-13.42%	8.08%	4.82%	7.73%
Consumer Discretionary	5.54%	-10.80%	7.79%	6.27%	7.86%
Retail/Wholesale	5.23%	-6.02%	5.32%	4.63%	4.88%
Business Service	0.98%	-1.16%	3.02%	3.74%	3.60%
Conglomerates	-14.41%	15.29%	-0.15%	-7.81%	-5.06%
Consumer Staples	-7.41%	13.58%	-0.55%	1.72%	-1.94%
Finance	-2.41%	-1.44%	-1.77%	-15.99%	-6.21%
Utilities	-0.48%	-15.30%	-4.06%	5.72%	6.25%
Construction	-11.28%	4.24%	-5.91%	-5.23%	14.42%
S&P	-3.30%	3.40%	7.54%	-0.62%	4.77%

Quarterly Growth: Total Revenues Expected

• Total revenue for the remaining S&P 500 firms seen falling 0.33%, down from 9.01% growth in the third quarter. Excluding financials, revenues expected rise 2.49% year over year in the fourth quarter. Significant slowdown from the 8.85% growth posted in the third quarter.
• Five sectors expected to post lower revenues than a year ago, eleven 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 at financials are notoriously flakey.
• Industrials, Transports and Materials sectors expected to post double-digit revenue growth in the third quarter. All of which also posted double-digit growth in the second quarter.
• 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
Industrial Products	-3.11%	0.90%	21.49%	12.75%	23.45%
Transportation	-3.99%	0.00%	11.95%	9.30%	15.12%
Basic Materials	-8.06%	0.00%	10.80%	-4.04%	18.59%
Utilities	-3.57%	0.00%	7.73%	-2.83%	5.57%
Computer and Tech	-3.91%	-0.35%	7.68%	5.99%	16.26%
Oils and Energy	3.10%	0.00%	6.94%	8.01%	15.75%
Business Service	-3.52%	0.63%	6.18%	6.49%	7.34%
Conglomerates	-7.14%	0.00%	5.71%	5.80%	4.37%
Consumer Discretionary	-10.01%	-0.78%	3.78%	2.00%	2.30%
Medical	-0.39%	-0.03%	1.75%	2.95%	8.52%
Aerospace	-7.59%	0.00%	1.18%	3.93%	2.24%
Construction	-3.24%	0.00%	-3.34%	3.97%	2.59%
Consumer Staples	-7.18%	0.15%	-3.54%	-3.79%	3.99%
Retail/Wholesale	8.69%	-10.26%	-6.47%	13.17%	3.54%
Auto	0.02%	0.00%	-9.11%	0.99%	3.17%
Finance	-9.43%	0.00%	-29.38%	-33.64%	10.69%
S&P 500	-1.23%	-1.85%	-0.33%	1.57%	9.01%
Excl Financials	-0.68%	1.61%	2.49%	4.97%	8.85%

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 11.97% from 7.88% a year ago, and up from 11.71% in the third quarter. Net margins ex-financials rise to 11.56% from 9.33% a year ago and from 10.69% in the third quarter.
• Fourteen sectors post higher net margins than a year ago, Construction goes from negative to positive, huge margin expansion among the Financials.
• 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
Business Service	23.81%	26.17%	25.48%	23.39%	24.21%	25.35%
Computer and Tech	19.06%	21.57%	19.58%	19.91%	18.51%	19.77%
Aerospace	12.39%	13.60%	11.70%	11.70%	12.96%	11.68%
Oils and Energy	12.78%	12.84%	12.78%	13.83%	13.34%	14.22%
Finance	15.26%	12.83%	13.67%	13.72%	12.71%	4.17%
Basic Materials	13.83%	11.85%	9.62%	10.17%	13.94%	8.35%
Consumer Staples	8.19%	10.32%	9.55%	7.25%	8.00%	10.58%
Consumer Discretionary	8.12%	9.93%	18.84%	10.90%	9.17%	9.23%
Conglomerates	9.16%	9.50%	8.81%	8.81%	6.38%	8.09%
Industrial Products	7.43%	7.52%	8.21%	7.47%	5.84%	5.09%
Transportation	6.18%	6.84%	7.93%	8.02%	5.09%	6.44%
Utilities	7.98%	6.40%	10.04%	4.77%	7.71%	5.74%
Medical	5.19%	6.07%	6.57%	6.07%	6.22%	5.68%
Auto	4.04%	3.93%	4.52%	4.30%	3.29%	3.43%
Construction	-1.62%	3.72%	3.64%	4.91%	-1.22%	-5.03%
Retail/Wholesale	4.12%	3.44%	3.35%	3.18%	4.16%	3.20%
S&P 500	12.21%	11.97%	11.71%	11.53%	10.79%	7.88%
Excl Financials	10.73%	11.56%	10.69%	10.29%	9.58%	9.93%

Quarterly Net Margins Expected

• Net margins expected to rise to 8.12% from 7.21% a year ago.
• Sequentially margins expected to fall from 8.37% in the third quarter but rebound to 8.58% in the first quarter.
• Excluding financials, margins expected to rise to 7.72% from 7.56% last year but down from 8.36% in the third quarter. The huge jump in financial margins expected would move the group from being a year-ago laggard to expected gold medal position.
• Ten sectors expected to see year over year growth in margins, six 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	12.72%	14.04%	8.43%	9.25%	9.33%	3.61%
Computer and Tech	13.64%	13.85%	14.70%	13.46%	13.52%	14.46%
Business Service	11.64%	12.83%	11.86%	11.80%	11.37%	11.49%
Consumer Staples	11.32%	10.91%	12.03%	11.06%	10.80%	10.53%
Medical	10.49%	9.54%	10.51%	10.60%	10.58%	9.35%
Consumer Discretionary	8.62%	8.86%	9.16%	9.05%	8.96%	8.64%
Transportation	7.89%	8.63%	8.91%	8.29%	6.82%	7.27%
Oils and Energy	7.92%	7.55%	7.04%	7.94%	7.35%	6.29%
Conglomerates	9.08%	6.85%	9.80%	8.50%	8.26%	8.49%
Industrial Products	7.87%	6.69%	7.85%	7.93%	6.20%	5.74%
Utilities	8.22%	6.44%	9.06%	8.34%	8.03%	6.84%
Aerospace	6.08%	5.98%	6.33%	6.69%	5.79%	6.88%
Auto	5.72%	5.27%	5.65%	6.61%	5.47%	4.25%
Basic Materials	8.00%	4.78%	5.31%	6.32%	5.38%	4.47%
Retail/Wholesale	4.43%	3.78%	3.87%	4.15%	3.79%	4.46%
Construction	1.72%	1.82%	2.28%	3.60%	1.89%	1.91%
S&P 500	8.58%	8.12%	8.37%	8.43%	8.06%	7.21%
NM x fin	8.33%	7.72%	8.36%	8.35%	7.93%	7.56%

Annual Total Net Income Growth

• Following a rise of just 1.52% in 2009, total earnings for the S&P 500 expected to jump 43.22% in 2010, 15.89% further in 2011.
• Early read of 2012 growth looking for 10.36% growth.
• All sectors expected to show total net income rise in 2011 and in 2012. Twelve by double digits in 2011, 11 in 2012.
• 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 +	196.68%	38.93%
Basic Materials	-49.90%	67.58%	36.61%	10.45%
Industrial Products	-38.63%	41.35%	27.13%	18.60%
Oils and Energy	-55.27%	46.69%	21.34%	12.77%
Finance	- to +	320.41%	20.60%	10.31%
Transportation	-30.14%	44.06%	20.12%	16.15%
Conglomerates	-23.83%	-0.85%	18.93%	16.81%
Auto	- to +	2165.64%	18.73%	5.74%
Consumer Discretionary	-15.59%	19.69%	18.14%	15.61%
Business Service	1.04%	14.88%	16.02%	13.31%
Computer and Tech	-4.12%	46.39%	15.92%	11.24%
Retail/Wholesale	2.55%	14.51%	14.16%	4.83%
Consumer Staples	5.75%	11.06%	9.77%	9.54%
Aerospace	-14.80%	14.94%	9.65%	10.64%
Medical	2.21%	8.61%	5.97%	6.51%
Utilities	-13.52%	1.44%	4.17%	5.72%
S&P	1.54%	43.22%	15.89%	10.36%

Annual Total Revenue Growth

• Total S&P 500 Revenue in 2010 expected to be 4.56% above 2009 levels, just a partial rebound from 6.70% 2009 decline.
• Total revenues for the S&P 500 expected to rise 5.36% in 2011, 4.82% in 2012.
• Energy to lead revenue race in 2010 and continue lead in 2011 mostly due to higher commodity prices. Industrials, Tech, Materials and Transportation also expected to show high revenue growth.
• All sectors but Staples and Finance expected to show positive top-line growth in 2011, but seven sectors expected to show 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).
• Revenue growth significantly different if financials are excluded, down 10.46% in 2009, but growth of 8.56% in 2010, 6.09% in 2011 and 5.32% in 2012.

Annual Total Revenue Growth
Sales Growth	2009	2010	2011	2012
Oils and Energy	-34.41%	19.25%	13.58%	6.87%
Industrial Products	-18.67%	12.65%	11.94%	8.75%
Computer and Tech	-5.84%	16.26%	10.05%	6.99%
Basic Materials	-19.30%	12.11%	9.89%	5.85%
Transportation	-13.65%	10.84%	9.39%	8.56%
Auto	-21.36%	5.54%	7.71%	7.69%
Consumer Discretionary	-10.05%	4.85%	6.17%	4.90%
Business Service	-2.35%	5.69%	6.10%	-3.47%
Construction	-15.92%	0.38%	5.83%	10.44%
Aerospace	6.30%	-0.51%	4.64%	5.74%
Medical	6.05%	8.73%	3.39%	2.91%
Retail/Wholesale	1.45%	4.50%	2.92%	5.19%
Utilities	-5.87%	4.15%	2.50%	3.08%
Conglomerates	-13.27%	0.58%	1.63%	5.07%
Finance	21.16%	-17.65%	-0.02%	0.88%
Consumer Staples	-2.03%	2.46%	-1.53%	3.95%
S&P	-6.70%	4.56%	5.36%	4.82%
Excluding Financials	-10.46%	8.56%	6.09%	5.32%

Annual Net Margins

• Net margins marching higher, from 5.88% in 2008 to 6.42% in 2009 to 8.80% expected for 2010, 9.68% expected for 2011. Trend expected to continue into 2012 with net margins of 10.19% expected in early going. A major source of earnings growth.
• Financials significantly distort overall net margins. Net margins ex-financials 7.78% in 2008, 7.13% in 2009, 8.25% expected for 2010, 8.93% in 2011. Expected to grow to 9.36% in 2012.
• Financials net margins soar from -8.42% in 2008 to 16.93% expected for 2012.
• Thirteen sectors seeing higher net margins in 2010 than in 2009. All sectors expected to post higher net margins in 2011 than in 2010. Widespread margin expansion currently expected for 2012 as well with 15 sectors expected to post continued expansion in 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%	15.44%	16.27%	16.91%
Finance	2.51%	12.84%	15.48%	16.93%
Business Service	11.11%	12.08%	13.20%	15.50%
Consumer Staples	9.94%	10.78%	12.01%	12.66%
Medical	9.72%	9.71%	9.95%	10.30%
Consumer Discretionary	7.72%	8.82%	9.81%	10.81%
Conglomerates	8.16%	8.04%	9.41%	10.46%
Transportation	5.87%	7.63%	8.38%	8.96%
Basic Materials	4.47%	6.68%	8.30%	8.66%
Oils and Energy	6.27%	7.71%	8.24%	8.69%
Industrial Products	5.66%	7.11%	8.07%	8.80%
Utilities	8.03%	7.82%	7.95%	8.15%
Aerospace	5.42%	6.27%	6.57%	6.87%
Auto	0.24%	5.26%	5.79%	5.69%
Retail/Wholesale	3.54%	3.88%	4.31%	4.29%
Construction	-0.10%	1.17%	3.27%	4.12%
S&P 500	6.42%	8.80%	9.68%	10.19%
Excluding Financials	7.13%	8.25%	8.93%	9.36%

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

• Revisions ratio for full S&P 500 at 1.91, up from 1.80, a very bullish reading.
• Ten sectors with revisions ratios above 2.0, five with ratios above 3.0. Still thin samples for some sectors.
• Thirteen sectors with positive revisions ratios, only three -- Utilities, Conglomerates and Staples -- below 1.0.
• Ratio of firms with rising to falling mean estimates at 1.88, up from 1.72, a bullish reading.
• Total number of revisions (4-week total) passed seasonal low at 2,242, up from 1,958 last week (14.5%).
• Increases at 1,471 up from 1,259 (16.8%), cuts at 771, up from 699 (10.3%).

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
Business Service	0.23	10	5	27	4	6.75	2.00
Transportation	0.61	6	3	50	8	6.25	2.00
Auto	-0.22	5	1	16	3	5.33	5.00
Industrial Products	0.50	11	6	40	10	4.00	1.83
Basic Materials	3.55	19	2	75	22	3.41	9.50
Aerospace	0.31	7	3	32	13	2.46	2.33
Oils and Energy	0.98	32	7	209	92	2.27	4.57
Computer and Tech	0.20	36	18	211	93	2.27	2.00
Consumer Discretionary	0.39	22	7	83	37	2.24	3.14
Retail/Wholesale	1.68	29	13	178	87	2.05	2.23
Medical	0.45	21	22	118	65	1.82	0.95
Construction	-1.77	10	1	27	16	1.69	10.00
Finance	0.07	45	25	311	202	1.54	1.80
Consumer Staples	-0.08	17	14	36	42	0.86	1.21
Conglomerates	-0.07	5	4	7	9	0.78	1.25
Utilities	-0.17	14	23	51	68	0.75	0.61
S&P	0.48	289	154	1471	771	1.91	1.88

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

• Revisions ratio for full S&P 500 at 1.65, down from 1.83 last week, still in bullish territory.
• Eight sectors have at least two increases per cut; Transports, Industrials and Autos lead, other cyclicals also strong, but on thin samples.
• Just two sectors -- Utilities and Staples -- with negative revisions ratios (below 1.0), 14 with ratios above 1.0.
• Ratio of firms with rising estimate to falling mean estimates at 1.48, up from 1.47, still in bullish territory.
• Total number of revisions (4-week total) at 1,595, up from 1,398 last week (14.1%).
• Increases at 992, up from 969 last week (2.4%), cuts rise to 603 from 529 last week (13.9%).

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
Transportation	0.66	6	3	28	1	28.00	2.00
Industrial Products	0.86	15	3	32	3	10.67	5.00
Auto	1.56	4	2	17	2	8.50	2.00
Basic Materials	2.12	14	7	53	14	3.79	2.00
Construction	2.60	7	3	14	4	3.50	2.33
Business Service	-0.64	6	9	15	5	3.00	0.67
Retail/Wholesale	0.22	24	18	181	80	2.26	1.33
Computer and Tech	0.48	40	17	127	67	1.90	2.35
Oils and Energy	1.17	29	10	131	70	1.87	2.90
Medical	0.49	28	15	99	58	1.71	1.87
Consumer Discretionary	0.64	17	12	54	36	1.50	1.42
Conglomerates	0.01	6	3	10	9	1.11	2.00
Finance	0.13	37	35	157	150	1.05	1.06
Aerospace	0.04	5	5	17	17	1.00	1.00
Utilities	-0.54	14	24	37	47	0.79	0.58
Consumer Staples	-0.20	15	14	20	40	0.50	1.07
S&P	0.43	267	180	992	603	1.65	1.48

Total Income and Share

• S&P 500 earned $544.3 billion in 2009, expected to earn $782.6 billion in 2010, $907.0 billion in 2011.
• Early expectations that the S&P 500 total earnings will hit the $1 Trillion mark in 2012 at $1.001 Trillion.
• Finance share of total earnings moves from 5.9% in 2009 to 17.4% in 2010. Rise to 18.2% expected for 2012, retaking the earnings crown, but still well below 2007 peak of over 30%.
• Medical share of total earnings far exceeds market cap share (index weight), but earnings share expected to shrink from 17.3% in 2009 to 11.5% 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.

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	$137,100	$165,342	$182,395	17.52%	18.23%	18.22%	16.10%
Computer and Tech	$135,736	$157,343	$175,027	17.34%	17.35%	17.49%	18.68%
Oils and Energy	$95,110	$115,408	$130,145	12.15%	12.72%	13.00%	11.71%
Medical	$101,927	$108,014	$115,048	13.02%	11.91%	11.49%	10.08%
Consumer Staples	$63,020	$69,177	$75,775	8.05%	7.63%	7.57%	8.24%
Retail/Wholesale	$57,631	$65,793	$68,973	7.36%	7.25%	6.89%	8.28%
Utilities	$50,358	$52,456	$55,456	6.43%	5.78%	5.54%	5.97%
Consumer Discretionary	$26,635	$31,468	$36,379	3.40%	3.47%	3.63%	4.13%
Conglomerates	$25,999	$30,921	$36,117	3.32%	3.41%	3.61%	3.81%
Basic Materials	$22,562	$30,823	$34,042	2.88%	3.40%	3.40%	3.30%
Industrial Products	$15,246	$19,382	$22,987	1.95%	2.14%	2.30%	2.46%
Aerospace	$14,886	$16,323	$18,061	1.90%	1.80%	1.80%	1.67%
Business Service	$13,206	$15,321	$17,360	1.69%	1.69%	1.73%	1.96%
Transportation	$11,743	$14,106	$16,384	1.50%	1.56%	1.64%	1.92%
Auto	$10,598	$12,583	$13,305	1.35%	1.39%	1.33%	1.16%
Construction	$844	$2,504	$3,478	0.11%	0.28%	0.35%	0.53%
S&P 500	$782,601	$906,963	$1,000,934	100.00%	100.00%	100.00%	100.00%

P/E Ratios

• Trading at 15.5x 2010, 13.4x 2011 earnings, or earnings yields of 6.45% and 7.46%, respectively.  Early 2012 P/E at 12.1x or earnings yield of 8.26%.
• 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, Aerospace and Energy also have low P/Es on 2011 and 2012 earnings.
• Construction has highest P/E for all three years, but falling fast.
• Auto and Finance high 2009 P/Es to fall dramatically in 2010 and 2011, continue down in 2012.
• S&P 500 earned $57.67 in 2009: $82.60 in 2010 and $95.84 in 2011 expected. Early expectation for $105.81 for 2012.

P/E Ratios
P/E	2009	2010	2011	2012
Auto	300.0	13.2	11.2	10.5
Medical	13.0	12.0	11.3	10.6
Finance	59.9	14.2	11.8	10.7
Oils and Energy	21.9	14.9	12.3	10.9
Aerospace	15.7	13.6	12.4	11.2
Basic Materials	29.7	17.7	13.0	11.8
Utilities	14.6	14.4	13.8	13.1
Computer and Tech	24.4	16.7	14.4	12.9
Consumer Staples	17.6	15.9	14.5	13.2
Conglomerates	17.6	17.8	14.9	12.8
Retail/Wholesale	20.0	17.4	15.3	14.6
Industrial Products	27.7	19.6	15.4	13.0
Business Service	20.7	18.0	15.5	13.7
Consumer Discretionary	22.5	18.8	15.9	13.8
Transportation	28.6	19.9	16.5	14.2
Construction	NM	76.2	25.7	18.5
S&P 500	22.2	15.5	13.4	12.1

Biggest FY1 Revisions

The table below shows the S&P 500 firms with the biggest increases in their FY1 (mostly 2010) mean estimate over the last 4 weeks. To qualify there must be more than 3 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.

Biggest FY1 Revisions
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
Ak Steel Hldg	AKS	18.23%	-0.95%	0.27	0.00	25.44	12.22
Utd States Stl	X	16.24%	3.89%	0.55	0.25	18.84	11.29
Jabil Circuit	JBL	14.49%	12.75%	1.00	0.88	10.90	9.38
Alcoa Inc	AA	12.93%	10.84%	0.31	0.27	13.19	10.61
Freept Mc Cop-B	FCX	11.62%	16.27%	0.53	0.33	10.29	9.98
Murphy Oil	MUR	9.27%	4.87%	0.50	0.25	11.74	10.90
Newmont Mining	NEM	8.75%	10.57%	0.41	0.21	11.10	11.11
Adobe Systems	ADBE	7.94%	8.30%	1.00	0.50	17.41	15.24
Marathon Oil Cp	MRO	7.35%	2.60%	0.50	0.29	9.21	8.39
Consol Energy	CNX	6.77%	-0.04%	0.48	0.00	17.01	11.15
Nvidia Corp	NVDA	6.68%	18.78%	0.42	0.59	38.97	27.15
Wynn Resrts Ltd	WYNN	6.56%	8.73%	0.26	0.22	47.29	36.35
Anadarko Petrol	APC	6.36%	-2.10%	0.21	0.21	36.22	24.51
Massey Egy Cpy	MEE	6.33%	12.56%	0.10	0.37	15.23	10.83
Apollo Group	APOL	5.61%	-1.16%	0.70	-0.18	9.13	9.47
Motorola Solutn	MSI	5.30%	-15.00%	0.33	0.17	12.67	10.86
Oracle Corp	ORCL	5.27%	4.89%	0.94	0.93	15.60	14.02
Hess Corp	HES	5.21%	11.52%	0.29	0.08	13.00	11.39

Data in this report, unless stated otherwise, is through the close on Thursday 1/20/2011.

We use the convention of referring to the next full fiscal year to be completed as 2010, but because 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
 
AK STEEL HLDG (AKS): Free Stock Analysis Report
 
FREEPT MC COP-B (FCX): Free Stock Analysis Report
 
JABIL CIRCUIT (JBL): Free Stock Analysis Report
 
UTD STATES STL (X): Free Stock Analysis Report
 
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