Off to a Good Start - Earnings Trends

Key Points:

• 4Q earnings season off to good start, but still very early, with just 31 firms having reported. Median surprise of 6.56% and surprise ratio of 3.00 for EPS, 0.773% and 2.50 for revenues.
• Reported (31 firms) fourth quarter earnings growth of 37.5%, expected (469 firms) year over year growth of 21.4% for the vast majority of firms yet to report. On Revenue side, 8.96% reported, but just 4.6% expected for those yet to report -- a slowdown from the 24.6% earnings and 9.15% revenue growth those firms reported in the Third Quarter.
• Net margins expected to expand to 8.73% (among those yet to report) from 7.28% a year ago, but down from 8.96% in third quarter. Excluding Financials, margins expected to rise to 8.20% from 7.95% a year ago, but down from 8.75% in the third quarter.
• Full-year total earnings for the S&P 500 expected to jump 43.0% in 2010, 14.3% further in 2011. Growth to continue in 2012 with total net income expected to rise 11.9%.
• Total revenues for the S&P 500 expected to rise 4.39% in 2010, 5.72% in 2011, and 4.98% in 2012.  Excluding Financials revenues expected to be up 8.62% in 2010, 6.26% in 2011 and 5.25% in 2012.
• Twelve sectors expected to post double digit earnings growth in 2011, 11 double-digit growers in 2012.  Cyclical Construction, Industrial and Materials sectors all expected to post growth of over 30% in 2011.
• Net Margins marching higher, from 5.88% in 2008 to 6.42% in 2009 to 8.78% expected for 2010, 9.48% expected for 2011 and 10.11% in 2012. Major source of earnings growth. Net margins ex-financials 7.79% in 2008, 7.11% in 2009, 8.22% expected for 2010, 8.85% in 2011, and 9.30% in 2012.
• Revisions ratio for full S&P 500 at 1.80 for 2011, at 1.64 for 2012 -- both bullish readings. Ratio of firms with rising to falling mean estimates at 1.72 for 2011, 1.47 for 2012, also positive readings. Total revisions activity past seasonal lows and will expand dramatically over the next few weeks. Current sample size is still thin.
• S&P 500 earned $544.3 billion in 2009, expected to earn $779.1 billion in 2010, $890.3 billion in 2011. In 2012 the 500 are collectively expected to earn $996.5 billion.
• S&P 500 earned $57.57 in 2009: $82.29 in 2010 and $93.71 in 2011 expected bottom up. For 2012, $105.23 expected in early read. Puts P/Es at 15.6x for 2010, and 13.7x for 2011 and 12.2x for 2012. 

"Gentlemen, Start Your Numbers"

The Fourth quarter earnings season is now officially underway. Alcoa (AA), Intel (INTC) and JPMorgan (JPM) got things rolling last week, and all three of those Dow components posted better-than-expected earnings.  Still, we have had just a handful (31) of S&P 500 firms report, mostly firms with November fiscal period ends, with a high proportion of retailers in the mix. Thus it is not exactly a representative sample yet.

The early reports are encouraging, with total net income for those firms rising 37.5% over a year ago. The early median surprise of 6.56% is also quite strong, although the ratio of positive to negative surprises is about normal at just 3.00.  However, those numbers are always extremely volatile in the early going and it is far to early to draw any real conclusions about the quarter. 

Most of the focus should be on the expectations for those who have yet to report. There the expectations are also positive, particularly on the earnings front. Total net income is expected to rise 21.4% over year-ago levels. While that is a slowdown from the year-over-year growth of the third quarter (24.6%) it is well above the growth that was expected for the third quarter just before the third quarter reporting season really got underway (15.5%).

Given that positive earnings surprises almost always outnumber disappointments, one does not need an overly active imagination to envision that growth will be close to 25% again when all is said and done for the quarter. Revenue growth though is expected to slow down significantly to 1.22% from positive growth of 8.27% in the third quarter.

On the other hand, revenue growth among the handful that have reported is very healthy at 8.96%. 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 4.55% year over year from 9.15%. Tougher year-over-year comparisons are a bigger part of the story.

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, were the whole concept of revenues is a bit different from most companies, and thus the concept of net margins is also a bit different. However, even if the Financials are excluded, net margins continue to march northward, at least year over year.

For the S&P 500 as a whole, net margins are expected to be 8.73% in the fourth quarter, up from “just” 7.28% a year ago, but down from 8.96% in the third quarter. If the Financials are excluded, margins are expected to rise to 8.20% from 7.95% a year ago but down from 8.75% in the third quarter. Those numbers are for the vast majority that have yet to report.

The reported net margins among the 31 early birds are 5.16%, up from 4.10% a year ago and from 5.04% in the third quarter. Excluding the Financials that have reported, net margins are 3.46%, up from 2.89% a year ago, but down slightly from the 3.50% those firms reported in the third quarter. Low-margin Retailers are over represented in the early non-financial sample.

2011 Expectations

The expectations for the full year are very healthy, with total net income for 2010 expected to rise to $779.1 billion in 2010, up from $544.3 billion in 2009. In 2011, the total net income for the S&P 500 should be $80.3 billion, or increases of 43.0% and 14.3%, respectively.

The early expectation is for 2012 to have total net income of $996.5 billion, or to be within spitting distance of 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 $106.15. That is up from $57.57 for 2009, $82.29 for 2010, and $93.71 for 2011. In an environment where the 10-year T-note is yielding just 3.32%, a P/E of 15.6x based on 2010 and 13.7x based on 2011 earnings looks attractive.

Much of the $600 billion in newly created money from QE2 is likely to eventually find its way into the equity market (not directly, but eventually). Historically, the year after mid-term elections has almost always been a good one for the stock market. The extension of unemployment benefits and the one-year cut in the payroll tax should be stimulative to the economy (the extension of the high end tax cuts is only slightly stimulative relative to letting them expire, and certainly does not provide any fresh stimulus to the economy). A stronger economy should allow earnings to continue to rise.
 
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 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. While it is inconceivable that it will not eventually be passed, 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 strong earnings growth.

Still, companies are expected to continue growing their earnings nicely, and the 14.3% 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 14.3% is not exactly awful. Even on the revenue side the expected growth in 2011 of 5.72%, or 6.26% 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 31 firms (6.2%) have reported, and many of those have November fiscal period ends.
• Off to a good start with a median surprise of 6.56%, and a 3.00 surprise ratio (21 beats, 7 misses), 67.7% of all firms beat expectations.
• Positive year over year growth for 25, falling EPS for 6 firms, 4.33 ratio, 80.6% of all firms reporting have higher EPS than last year.
• Total net income up 37.52% among those that have reported.
• Six sectors have yet to have any firms report, four more have only a single report in.
• Sector medians not that significant yet, but for what it's worth, it looks like the cyclical sectors are leading in the surprise counts.

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	169.57%	9.09%	466.67	1	0	1	0
Basic Materials	5925.00%	8.70%	55.26	2	0	2	0
Consumer Discretionary	18.44%	9.09%	12.87	2	1	3	0
Finance	53.41%	3.85%	12.00	3	0	3	0
Computer and Tech	44.15%	10.00%	10.64	5	1	7	0
Industrial Products	-6.67%	5.00%	8.11	1	0	0	1
Business Service	6.35%	5.26%	5.71	1	0	1	0
Retail/Wholesale	10.26%	20.00%	2.90	5	3	7	2
Consumer Staples	-2.98%	7.89%	0.00	1	1	1	2
Transportation	-17.97%	11.11%	-11.45	0	1	0	1
Medical	Na	0.00%	na	Na	Na	na	Na
Auto	Na	0.00%	na	Na	Na	na	Na
Conglomerates	Na	0.00%	na	Na	Na	na	Na
Aerospace	Na	0.00%	na	Na	Na	na	Na
Oils and Energy	Na	0.00%	na	Na	Na	na	Na
Utilities	Na	0.00%	na	Na	Na	na	Na
S&P	37.52%	6.20%	6.56	21	7	25	6

Sales Surprises

• Sales Surprise ratio at 2.50, median surprise 0.773%, 64.5% of all firms do better than expected on top line. 
• Growing Revenues outnumber falling revenues by ratio of 3.43, 77.4% of firms have higher revenues than a year ago.
• Revenue growth very healthy at 8.96% but still greatly lags earnings growth pointing to net margin expansion (see net margin tables below). Still very early in this winter quarter, so take numbers with a bag of (rock) 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
Consumer Discretionary	8.82%	9.09%	4.196	3	0	3	0
Industrial Products	5.88%	5.00%	2.27	1	0	1	0
Computer and Tech	24.19%	10.00%	2.005	5	2	7	0
Basic Materials	4.94%	8.70%	1.761	2	0	2	0
Retail/Wholesale	5.21%	20.00%	0.548	6	3	7	2
Business Service	3.02%	5.26%	0.277	1	0	1	0
Finance	8.79%	3.85%	0	0	0	2	1
Consumer Staples	-0.55%	7.89%	-1.085	1	2	0	3
Transportation	12.05%	11.11%	-1.349	0	1	1	0
Medical	Na	Na	Na	Na	Na	na	Na
Auto	Na	Na	Na	Na	Na	na	Na
Conglomerates	Na	Na	Na	Na	Na	na	Na
Aerospace	Na	Na	Na	Na	Na	na	Na
Oils and Energy	Na	Na	Na	Na	Na	na	Na
Utilities	Na	Na	Na	Na	Na	na	Na
S&P	8.96%	6.20%	0.773	20	8	24	7

Reported Quarterly Growth: Total Net Income

• The total net income is 37.52% above what was reported in the fourth quarter of 2009, up from 34.15% growth these same 31 firms reported in the third quarter.
• Sequential earnings growth is 1.90%.
• Looking ahead to the first quarter, growth for these 31 firms is expected to slow to 15.59% year over year, and fall 2.91% from fourth quarter levels.
• Huge growth for Materials and Construction sectors a function of small sample sizes and very low year-ago earnings.
• The expected growth table is probably of more interest at this point.

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
Basic Materials	427.58%	406.52%	5925.00%	17.86%	-9.80%
Construction	-118.11%	6.67%	169.57%	17.21%	181.08%
Finance	-12.35%	10.46%	53.41%	-40.05%	23.84%
Computer and Tech	-18.64%	15.71%	44.15%	9.56%	65.62%
Consumer Discretionary	-20.88%	-54.75%	18.44%	-6.75%	19.06%
Retail/Wholesale	47.97%	-10.66%	10.26%	1.78%	17.92%
Business Service	-6.34%	1.52%	6.35%	2.03%	6.45%
Consumer Staples	-26.72%	22.79%	-2.98%	4.20%	-4.57%
Industrial Products	-6.85%	-8.20%	-6.67%	6.45%	-7.58%
Transportation	21.30%	-25.53%	-17.97%	43.63%	109.94%
Medical	Na	na	na	Na	Na
Auto	Na	na	na	Na	Na
Conglomerates	Na	na	na	Na	Na
Aerospace	Na	na	na	Na	Na
Oils and Energy	Na	na	na	Na	Na
Utilities	Na	na	na	Na	Na
S&P	-2.91%	1.90%	37.52%	15.59%	34.15%

Expected Quarterly Growth: Total Net Income

• Total net income for the S&P 500 in the third quarter of 2010 (among those yet to report) is expected to rise 21.38% over fourth quarter of 2009 levels.
• Slowdown from the 24.57% growth those same firms had in the third quarter. A severe slowdown to 6.63% growth expected in the first quarter due to much more difficult comparisons.
• Finance expected to post largest gains by a large margin. Seven other sectors expected to post double digit gains, with Industrials, Transportation and Energy expecting gains of over 20%.
• Four sectors expected to post lower total income than a year ago.
• Earnings are expected to be down 2.51% from what these same firms reported in the third quarter.
• At this point in the third quarter season, the expectations were for just 15.54% growth, so actual results could be much stronger. I would pencil in year-over-year earnings growth of closer to 25% by the time all is said and done.

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	1.32%	0.17%	243.86%	-8.64%	29.04%
Industrial Products	-4.19%	-11.36%	51.63%	27.27%	53.07%
Transportation	-13.66%	-3.30%	33.49%	27.26%	60.83%
Oils and Energy	7.60%	6.07%	30.25%	17.85%	36.66%
Auto	11.56%	-1.42%	22.03%	20.20%	90.75%
Basic Materials	35.27%	-7.57%	18.59%	31.73%	43.05%
Business Service	-3.90%	9.18%	13.96%	15.03%	15.95%
Computer and Tech	-15.10%	6.12%	10.14%	7.98%	42.58%
Consumer Discretionary	-10.22%	4.05%	5.48%	-0.19%	15.92%
Utilities	21.16%	-28.90%	1.58%	-2.22%	6.37%
Consumer Staples	-2.01%	-10.94%	1.55%	4.21%	5.78%
Medical	12.34%	-9.81%	0.87%	1.49%	10.96%
Conglomerates	5.54%	-11.28%	-6.50%	22.66%	6.20%
Aerospace	-9.11%	4.61%	-6.94%	9.76%	144.50%
Retail/Wholesale	1.12%	16.08%	-8.37%	20.33%	8.92%
Construction	46.27%	-27.73%	-12.46%	43.89%	465.28%
S&P	1.59%	-2.51%	21.38%	6.63%	24.57%

Quarterly Growth: Total Revenues Reported

• Early Revenue growth very strong at 8.96%, up from the 6.68% growth the same firms posted in the third quarter.
• Sequentially, revenues 0.20% lower than in the third quarter.
• Looking to first quarter, growth among these 31 firms expected to slow to 3.98% year over year, but accelerate to 3.25% 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
Computer and Tech	3.40%	5.37%	24.19%	16.59%	34.64%
Transportation	6.30%	1.85%	12.05%	10.88%	18.08%
Consumer Discretionary	5.36%	-11.00%	8.82%	6.55%	8.46%
Finance	-7.43%	10.26%	8.79%	-11.85%	-10.56%
Industrial Products	1.39%	1.41%	5.88%	5.10%	3.59%
Retail/Wholesale	5.36%	-6.56%	5.21%	4.33%	4.90%
Basic Materials	26.05%	3.34%	4.94%	15.40%	11.49%
Business Service	0.98%	-1.16%	3.02%	3.74%	3.60%
Consumer Staples	-7.44%	13.58%	-0.55%	1.79%	-1.94%
Construction	-11.98%	4.24%	-5.91%	-1.57%	14.42%
Medical	Na	Na	na	Na	na
Auto	Na	Na	na	Na	na
Conglomerates	Na	Na	na	Na	na
Aerospace	Na	Na	na	Na	na
Oils and Energy	Na	Na	na	Na	na
Utilities	Na	Na	na	Na	na
S&P	3.25%	-0.20%	8.96%	3.98%	6.68%

Quarterly Growth: Total Revenues Expected

• Total revenue for the remaining S&P 500 firms expected rise 1.12% year over year in the fourth quarter. Significant slowdown from the 8.27% 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.
• Excluding Financials, total revenues expected to grow 4.45%, down from 9.15% in the third quarter.
• Five sectors expected to post double-digit revenue growth in the third quarter. All of which also posted double-digit growth in the second quarter and are expected be among the leaders again in the first 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	-2.70%	0.86%	20.66%	12.10%	23.60%
Oils and Energy	-0.34%	0.00%	16.78%	14.06%	16.11%
Transportation	-3.46%	0.00%	12.36%	9.35%	16.29%
Basic Materials	5.36%	0.00%	10.50%	10.84%	18.03%
Computer and Tech	-6.78%	-0.24%	10.30%	8.23%	18.38%
Utilities	-3.17%	0.00%	7.31%	-2.78%	5.59%
Business Service	-3.50%	0.63%	6.17%	6.51%	7.34%
Consumer Discretionary	-9.64%	-0.78%	3.80%	2.40%	2.25%
Medical	0.02%	-0.03%	2.39%	3.32%	8.56%
Conglomerates	-10.46%	0.00%	1.35%	0.15%	-0.11%
Aerospace	-7.34%	0.00%	1.29%	3.92%	2.36%
Construction	-3.29%	0.00%	-3.37%	3.88%	2.59%
Consumer Staples	-7.50%	0.15%	-3.61%	-4.18%	3.99%
Retail/Wholesale	8.57%	-10.17%	-6.35%	13.14%	3.55%
Auto	0.23%	0.00%	-6.83%	2.22%	5.02%
Finance	-3.00%	0.00%	-20.44%	-25.88%	3.09%
S&P 500	-1.53%	-1.58%	1.12%	1.88%	8.27%
Excl Financials	-1.35%	3.47%	4.55%	6.64%	9.15%

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 5.16% from 4.36% a year ago, and up from 5.04% in the third quarter. Net margins ex-Financials rise to 3.46% from 3.28% a year ago.
• Seven sectors post higher net margins than a year ago; Construction and Materials go from negative to positive.
• Low Margin Retail firms over represented in early sample, margins will rise as more firms report.

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	20.02%	23.64%	21.53%	24.00%	21.30%	20.37%
Finance	17.65%	18.52%	18.48%	18.68%	11.11%	13.13%
Consumer Staples	8.19%	10.32%	9.55%	7.25%	8.00%	10.58%
Consumer Discretionary	7.88%	9.77%	19.21%	10.81%	9.00%	8.97%
Industrial Products	5.76%	5.98%	6.60%	5.94%	5.68%	6.78%
Construction	-1.03%	3.72%	3.64%	4.91%	-1.22%	-5.03%
Basic Materials	12.14%	3.11%	0.64%	7.13%	11.88%	-0.06%
Transportation	3.56%	2.94%	4.02%	4.44%	2.75%	4.01%
Retail/Wholesale	3.50%	2.62%	2.74%	2.51%	3.59%	2.50%
Auto	na	na	Na	Na	na	Na
Conglomerates	na	na	Na	Na	na	Na
Aerospace	na	na	Na	Na	na	Na
Oils and Energy	na	na	Na	Na	na	Na
Utilities	na	na	Na	Na	na	Na
Medical	na	na	Na	Na	na	Na
S&P 500	5.18%	5.16%	5.04%	5.21%	4.36%	4.10%
Excl Financials	3.73%	3.46%	3.50%	3.55%	3.28%	2.89%

Quarterly Net Margins Expected

• Net margins expected to rise to 8.73% from 7.28% a year ago.
• Sequentially, margins expected to fall from 8.96% in the third quarter but rebound to 9.01% in the first quarter.
• Excluding Financials, margins rise to 8.20% from 7.95% last year but down from 8.75% in the third quarter. Huge jump in Financial margins expected, moves from being year-ago laggard to expected silver-medal position.
• Nine sectors expected to see year over year growth in margins, seven 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
Computer and Tech	14.47%	15.89%	15.85%	14.64%	14.50%	15.91%
Finance	13.72%	13.14%	10.29%	10.84%	11.13%	3.04%
Business Service	12.28%	12.34%	11.86%	11.80%	11.37%	11.49%
Consumer Staples	11.75%	11.09%	12.03%	11.06%	10.80%	10.53%
Transportation	8.32%	9.30%	9.89%	9.35%	7.15%	7.83%
Medical	9.99%	8.89%	10.13%	10.17%	10.17%	9.03%
Consumer Discretionary	8.76%	8.82%	9.17%	9.08%	8.99%	8.68%
Conglomerates	9.02%	7.65%	9.35%	8.64%	7.36%	8.29%
Industrial Products	7.02%	7.13%	7.89%	7.94%	6.19%	5.67%
Oils and Energy	7.60%	7.04%	7.14%	8.00%	7.35%	6.31%
Utilities	8.07%	6.45%	9.08%	8.27%	8.03%	6.82%
Aerospace	6.27%	6.39%	6.44%	6.79%	5.94%	6.96%
Basic Materials	8.15%	6.35%	6.79%	7.16%	6.86%	5.92%
Auto	6.02%	5.41%	5.45%	6.26%	5.12%	4.13%
Retail/Wholesale	4.18%	4.49%	4.02%	4.30%	3.93%	4.59%
Construction	2.62%	1.73%	2.28%	3.60%	1.89%	1.91%
S&P 500	9.01%	8.73%	8.96%	8.95%	8.61%	7.28%
Excl Fin'l	8.45%	8.20%	8.75%	8.65%	8.18%	7.95%

Annual Total Net Income Growth

• Following rise of just 1.52% in 2009, total earnings for the S&P 500 expected to jump 42.97% in 2010, 14.27% further in 2011.
• Early read of 2012 growth looking for 11.9% 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 +	199.18%	35.91%
Basic Materials	-49.90%	66.03%	35.87%	10.81%
Conglomerates	-23.83%	-0.92%	30.24%	6.69%
Industrial Products	-38.63%	41.27%	26.29%	18.89%
Transportation	-30.14%	43.70%	20.07%	16.23%
Oils and Energy	-55.94%	48.99%	18.02%	15.82%
Consumer Discretionary	-15.59%	19.78%	17.15%	16.33%
Computer and Tech	-4.10%	45.81%	16.02%	9.92%
Business Service	1.04%	14.88%	15.77%	13.57%
Auto	- to +	2164.87%	15.72%	7.67%
Finance	- to +	315.11%	13.69%	18.61%
Consumer Staples	5.76%	11.07%	10.24%	9.04%
Medical	2.21%	8.47%	8.51%	4.11%
Aerospace	-14.80%	14.84%	7.04%	13.48%
Retail/Wholesale	2.55%	14.37%	5.98%	13.07%
Utilities	-13.52%	1.46%	4.18%	5.69%
S&P	1.52%	42.97%	14.27%	11.93%

Annual Total Revenue Growth

• Total S&P 500 Revenue in 2010 expected to be 4.39% above 2009 levels, just a partial rebound from 6.70% 2009 decline.
• Total revenues for the S&P 500 expected to rise 5.72% 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, Tech, Materials and Transportation also expected to show high revenue growth.
• All sectors but Staples expected to show positive top line growth in 2011, but six 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 8.62% in 2010, 6.26% in 2011, and 5.25% in 2012.

Annual Total Revenue Growth
Sales Growth	2009	2010	2011	2012
Oils and Energy	-34.50%	21.06%	14.44%	6.66%
Industrial Products	-18.67%	12.61%	11.65%	8.32%
Computer and Tech	-5.83%	15.17%	10.13%	6.75%
Basic Materials	-19.30%	11.96%	9.37%	5.79%
Transportation	-13.65%	10.71%	9.34%	8.64%
Consumer Discretionary	-10.05%	3.44%	7.54%	5.33%
Auto	-21.36%	5.54%	7.41%	7.69%
Business Service	-2.35%	5.68%	6.09%	-3.52%
Construction	-15.92%	0.37%	5.87%	10.20%
Aerospace	6.30%	-0.49%	4.65%	5.72%
Medical	6.05%	8.68%	3.45%	2.83%
Retail/Wholesale	1.45%	4.50%	2.91%	5.17%
Utilities	-5.87%	4.07%	2.44%	3.04%
Conglomerates	-13.27%	0.59%	1.80%	5.12%
Finance	21.16%	-19.07%	1.69%	2.90%
Consumer Staples	-2.03%	2.46%	-1.59%	3.95%
S&P	-6.70%	4.39%	5.72%	4.98%
Excluding Financials	-10.46%	8.62%	6.26%	5.25%

Annual Net Margins

• Net Margins marching higher, from 5.88% in 2008 to 6.41% in 2009 to 8.78% expected for 2010, 9.48% expected for 2011. Trend expected to continue into 2012 with net margins of 10.11% expected in early going. Major source of earnings growth.
• Financials significantly distort overall net margins. Net margins ex-Financials 7.78% in 2008, 7.11% in 2009, 8.22% expected for 2010, 8.85% in 2011. Expected to grow to 9.30% in 2012.
• Financials net margins soar from -8.42% in 2008 to 16.62% 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.

Annual Net Margins
Net Margins	2009A	2010E	2011E	2012E
Computer and Tech	12.27%	15.53%	16.36%	16.85%
Finance	2.51%	12.90%	14.42%	16.62%
Business Service	11.11%	12.08%	13.18%	15.51%
Consumer Staples	9.94%	10.78%	12.07%	12.67%
Conglomerates	8.16%	8.04%	10.28%	10.44%
Medical	9.72%	9.70%	10.18%	10.30%
Consumer Discretionary	7.72%	8.94%	9.74%	10.76%
Transportation	5.87%	7.62%	8.37%	8.95%
Basic Materials	4.47%	6.63%	8.23%	8.62%
Industrial Products	5.67%	7.11%	8.04%	8.83%
Utilities	8.03%	7.83%	7.96%	8.16%
Oils and Energy	6.13%	7.55%	7.78%	8.45%
Aerospace	5.42%	6.26%	6.40%	6.87%
Auto	0.24%	5.25%	5.66%	5.66%
Retail/Wholesale	3.54%	3.88%	3.99%	4.29%
Construction	-0.10%	1.17%	3.31%	4.08%
S&P 500	6.41%	8.78%	9.48%	10.11%
Excluding Financials	7.11%	8.22%	8.85%	9.30%

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

• Revisions ratio for full S&P 500 at 1.80, up from 1.71, a very bullish reading.
• Ten sectors with revisions ratios above 2.0, six with ratios at or above 3.0. Very thin samples for some sectors.
• Fourteen sectors with positive revisions ratios, only two -- Utilities and Staples -- below 1.0.
• Ratio of firms with rising to falling mean estimates at 1.72, up from 1.62, a bullish reading.
• Total number of revisions (4-week total) passed seasonal low at 1,958, up from 1,536 last week (27.5%).
• Increases at 1,259 up from 969 (29.9%), cuts at 699, up from 587 (19.1%).
• Earnings season is now underway. This will cause total revisions activity to soar in next few weeks.

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	0.30	5	1	20	2	10.00	5.00
Business Service	0.17	9	6	31	7	4.43	1.50
Industrial Products	0.28	13	4	37	9	4.11	3.25
Aerospace	0.32	7	3	29	9	3.22	2.33
Basic Materials	3.34	14	6	61	19	3.21	2.33
Conglomerates	0.72	7	2	33	11	3.00	3.50
Consumer Discretionary	0.41	18	9	67	25	2.68	2.00
Transportation	0.37	6	3	42	16	2.63	2.00
Oils and Energy	1.20	33	4	191	84	2.27	8.25
Retail/Wholesale	1.56	31	13	172	81	2.12	2.38
Computer and Tech	-0.03	34	21	152	84	1.81	1.62
Medical	0.23	18	24	79	51	1.55	0.75
Finance	0.13	47	26	266	175	1.52	1.81
Construction	-5.85	7	4	18	15	1.20	1.75
Consumer Staples	-0.11	14	14	30	48	0.63	1.00
Utilities	-0.45	14	21	31	63	0.49	0.67
S&P	0.32	277	161	1259	699	1.80	1.72

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

• Revisions ratio for full S&P 500 at 1.64, up from 1.58 last week, in bullish territory.
• Eight sectors have at least two increases per cut, Industrials, Transports and Autos lead, other cyclicals also strong, but on thin samples.
• Just three sectors with negative revisions ratios (below 1.0), 13 with ratios above 1.0.
• Ratio of firms with rising estimate to falling mean estimates at 1.47, down from 1.61, still in bullish territory.
• Total number of revisions (4-week total) at 1,398, up from 1,050 last week (33.1%).
• Increases at 969, up from 643 last week (50.7%), cuts rise to 529 from 407 last week (30.0%).

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	0.53	6	3	32	2	16.00	2.00
Industrial Products	0.22	11	6	25	3	8.33	1.83
Auto	1.28	4	1	14	2	7.00	4.00
Basic Materials	1.68	15	7	37	14	2.64	2.14
Conglomerates	0.75	7	2	21	8	2.63	3.50
Construction	2.19	8	3	11	5	2.20	2.67
Business Service	-0.71	5	11	19	9	2.11	0.45
Retail/Wholesale	0.21	27	16	179	88	2.03	1.69
Computer and Tech	0.43	42	15	110	57	1.93	2.80
Oils and Energy	1.24	23	14	107	58	1.84	1.64
Medical	0.18	23	18	68	37	1.84	1.28
Consumer Discretionary	0.56	17	7	44	29	1.52	2.43
Finance	0.84	43	29	148	111	1.33	1.48
Aerospace	0.23	4	6	12	17	0.71	0.67
Utilities	-0.67	15	24	25	42	0.60	0.63
Consumer Staples	-0.25	11	16	17	47	0.36	0.69
S&P	0.44	261	178	869	529	1.64	1.47

Total Income and Share

• S&P 500 earned $544.3 billion in 2009, expected to earn $779.1 billion in 2010, $890.3 billion in 2011.
• Early expectations that the S&P 500 total earnings well come close to the $1 Trillion mark in 2012 at $996.5 billion.
• Finance share of total earnings moves from 5.9% in 2009 to 17.4% in 2010. Rise to 18.3% 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 11.54% 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
Computer and Tech	$135,346	$157,027	$172,611	17.37%	17.64%	17.32%	18.71%
Finance	$135,370	$153,906	$182,554	17.38%	17.29%	18.32%	16.21%
Oils and Energy	$94,172	$111,145	$128,723	12.09%	12.48%	12.92%	11.59%
Medical	$101,798	$110,464	$115,005	13.07%	12.41%	11.54%	10.05%
Consumer Staples	$63,027	$69,482	$75,761	8.09%	7.80%	7.60%	8.23%
Retail/Wholesale	$57,560	$61,001	$68,973	7.39%	6.85%	6.92%	8.18%
Utilities	$50,367	$52,474	$55,460	6.46%	5.89%	5.57%	5.97%
Conglomerates	$25,982	$33,839	$36,102	3.33%	3.80%	3.62%	3.82%
Consumer Discretionary	$26,654	$31,225	$36,323	3.42%	3.51%	3.65%	4.12%
Basic Materials	$22,354	$30,372	$33,654	2.87%	3.41%	3.38%	3.39%
Industrial Products	$15,244	$19,252	$22,888	1.96%	2.16%	2.30%	2.49%
Aerospace	$14,874	$15,920	$18,067	1.91%	1.79%	1.81%	1.62%
Business Service	$13,205	$15,287	$17,362	1.69%	1.72%	1.74%	1.94%
Transportation	$11,714	$14,065	$16,348	1.50%	1.58%	1.64%	1.95%
Auto	$10,594	$12,260	$13,200	1.36%	1.38%	1.32%	1.20%
Construction	$846	$2,532	$3,442	0.11%	0.28%	0.35%	0.53%
S&P 500	$779,107	$890,252	$996,472	100.00%	100.00%	100.00%	100.00%

P/E Ratios

• Trading at 15.8x 2010, 13.7x 2011 earnings, or earnings yields of 6.41% 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 3.33%, 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/E's to fall dramatically in 2010 and 2011, continue down in 2012.
• S&P 500 earned $57.57 in 2009: $82.29 in 2010 and $93.71 in 2011 expected. Early expectation for $105.23 for 2012.

P/E Ratios
P/E	2009	2010	2011	2012
Medical	13.0	12.0	11.1	10.6
Oils and Energy	312.3	13.8	11.9	11.1
Aerospace	15.2	13.2	12.4	10.9
Finance	22.3	15.0	12.7	10.9
Auto	60.4	14.5	12.8	10.8
Utilities	30.6	18.4	13.6	12.3
Basic Materials	17.7	17.9	13.7	12.9
Consumer Staples	14.6	14.4	13.8	13.1
Conglomerates	17.6	15.9	14.4	13.2
Computer and Tech	24.5	16.8	14.5	13.2
Retail/Wholesale	20.5	17.8	15.4	13.6
Consumer Discretionary	28.1	19.9	15.7	13.2
Industrial Products	22.5	18.8	16.0	13.8
Busines Service	19.7	17.3	16.3	14.4
Transportation	29.1	20.3	16.9	14.5
Construction	NM	76.1	25.5	18.7
S&P 500	22.3	15.6	13.7	12.2

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
Jabil Circuit	JBL	14.49%	12.75%	1.00	0.88	10.76	9.26
Ak Steel Hldg	AKS	12.52%	3.40%	0.27	0.17	27.65	12.11
Utd States Stl	X	10.38%	3.35%	0.36	0.13	20.37	11.65
Newmont Mining	NEM	8.15%	14.12%	0.29	0.15	11.85	11.85
Adobe Systems	ADBE	7.94%	8.30%	1.00	0.50	16.51	14.45
Hcp Inc	HCP	7.90%	17.59%	0.63	0.83	14.90	13.23
Murphy Oil	MUR	7.47%	2.01%	0.43	0.25	11.71	10.46
Pall Corp	PLL	6.80%	6.25%	1.00	0.90	19.04	16.77
Hess Corp	HES	6.46%	7.06%	0.24	0.00	12.85	11.64
Tesoro Corp	TSO	6.33%	-0.76%	0.35	0.25	12.61	9.16
Oracle Corp	ORCL	5.72%	5.41%	0.94	0.93	15.46	13.89
Discover Fin Sv	DFS	5.62%	7.30%	0.38	0.25	9.81	8.79
Motorola Solutn	MSI	5.30%	-14.40%	0.17	0.00	12.88	10.96
First Solar Inc	FSLR	5.19%	4.32%	0.55	0.29	14.91	11.97
Freept Mc Cop-B	FCX	5.18%	1.92%	0.29	0.09	11.14	11.45

Data in this report, unless stated otherwise, is through the close on Thursday 1/13/2011.

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.
 
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