Number of Postive Revisions Rises Dramatically

• Earnings season is almost over with 88.4% of reports in
• Total reported net income is down 32.0% from year ago, but up 86.8% from Q4
• Financials are much better than expected, but the quality of earnings is awful
• Ex-Financials, total earnings are down 36.4% from a year ago and down 20.1% from Q4
• Total net income is down in all sectors but Financials and Health Care
• Health Care, Tech and Discretionary all showing lots of positive surprises
• Full S&P total net income expected to be 31.9% lower than Q1 2008
• Decline expected to continue in Q2, with a 31.9% year-over-year
• Total net income expected to fall 15.7% for all of 2009, after 18.9% fall in 2008
• Revisions Ratios improve into Neutral Territory
• Bottom-up estimate for S&P 500 now $57.43 in 2009 versus $57.76 last week.

Total Net Income Growth

With earnings season almost over, it looks like the Financial sector will actually post the best year-over-year growth in total net income of any sector. However, the quality of those earnings is exceedingly poor. By and large, the analysts have not been all that impressed, since they continue to cut their full year earnings estimates for stocks in the sector by a greater ratio, relative to increases than in any other sector. Still, it looks like Financials will take the gold for the quarter, even if 3.1% growth would normally be nothing to write home about, especially if it was largely done with smoke and mirrors.

Health Care and Utilities both look to be essentially unchanged relative to a year ago, and every other sector is facing significant declines in total net income, ranging from an 8.3% drop among the Consumer Staples, to a plunge into red ink from the black among the Consumer Discretionary names that have been reported. However, the Consumer sectors are the ones with the most firms still to report, so there is still time for them to change their rankings. (Given the expectations for the late reporters, that seems unlikely.)

All told, 442 firms (88.4%) have reported total net income of $110.4 billion, a sharp drop from the $162.4 billion those same firms reported a year ago. It is however, a very sharp improvement from the $59.1 billion they collectively earned in the fourth quarter.

A green shoot? Perhaps, but more than all of the sequential improvement is due to the Financial sector, most notably a much smaller loss in the first quarter for American International Group (AIG - Snapshot Report) than in the fourth quarter.

If we strip out the Financials, which to my mind are clearly a special case, then the 365 non-Financial firms have collectively earned a total of $91.7 billion, down 36.4% from a year ago and down 20.1% from the fourth quarter. Just because it is a green shoot, does not mean that it is not a weed.

Looking at the full year expectations, every sector is expected to post lower total net income in 2009 than in 2008, with the exception of the Financials. That sector, which collectively lost money last year, is expected to be back in the black this year.

All told, total net income is expected to fall 15.7% in 2009, coming on the heels of an 18.9% decline last year. This does, however, imply a bit of a second half recovery.

With a drop of 31.9% expected when all is said and done for the first quarter, and a 35.7% drop for the second quarter, growth would have to turn positive in the second half to get to down "just 15.7%. I suspect most of the earnings growth will be in the fourth quarter, due to extremely easy comparisons. After all in the fourth quarter of 2008, earnings were down 61.8% from the fourth quarter of 2007.

Scorecard and Median EPS Growth Rates

• Surprise Ratio at 2.03 (below normal); median surprise at 4.17% (above normal)
• Median EPS decline reported so far is 17.3%
• Every sector but Telecom and Health Care is down so far among the reported firms
• Materials, Energy and Financials post biggest declines in median EPS growth
• Only Staples and Discretionary have large numbers of firms yet to report
• Positive surprises concentrated in the Discretionary, Health Care and Tech Sectors
• Full year 2008 EPS expected to be down 10.0% among reported firms

Median EPS year-over-year growth paints a somewhat different picture than does total net income growth. The overall quarterly declines reported are significantly smaller, at 17.3%. the rankings of the sectors are different, most notably in the case of the Financials where instead of leading, it is near the back of the pack with a 35.0% decline.

Overall we are seeing more than twice as many positive surprises as disappointments, but surprises leading disappointments is normal. Firms learned long ago that it is better to under promise and over deliver.

The size of the median surprise is bigger than normal at 4.17%, however. That does seem to be a legitimate green shoot.

Overall, Tech has the best looking surprise profile, with a ratio of positive surprises to disappointments of 4.55:1 and a median surprise of 8.6%. Consumer Discretionary also looks good with a surprise ratio of 2.57:1 and a huge median surprise of 10.8%. The Financials are the only sector with more disappointments than positive surprises.

The Zacks Revisions Ratio: 2009

• Revisions ratio for full S&P 500 up to 0.85, from 0.65 last week
• One month ago, the ratio was 0.32; the improvement has been steady and strong
• Five sectors in positive territory, Telecom and Tech lead
• Now into Neutral territory for the S&P 500 as a whole
• Energy and Financials continue to see estimates cut
• Ratio of firms with rising to falling mean estimates rises to 0.72 from 0.51
• Total number of revisions (4-week total) up to 4,046 from 3,161 last week (28.3%)
• Increases up to 1,858 from 1,246 (49.1%); cuts up to 2,198 from 1,915 (12.7%)
• Total Revisions activity will peak in next few weeks

While we are still seeing more estimate cuts than increases, the ratio has improved dramatically over the past month. This has been happening on a far larger total number of revisions.

A month ago, there were only 480 increases (four week moving total) and 1,500 cuts for a ratio of 0.32. Since then the number of estimate increases as almost quadrupled to 1,858, while the number of cuts has risen by only 46.5%, resulting in a ratio of 0.85.

I see this as a very significant "glimmer of hope". Half of the sectors are now, not just above 1.0, but into true positive territory.

Telecom is extremely strong, with almost four increases for every cut. It however is a very small sector. Perhaps more significant is the very strong showing among the Tech firms with a ratio of 1.75.

Better-than-expected first-quarter earnings are leading to positive estimate revisions. This is not only true for the S&P 500 as a whole but at the sector level as well. Just compare the positive surprises versus disappointments in the table above with where the sectors are on the Revisions ratio rankings.

Not all sectors are doing well however. The analysts continue to slash their estimates for the Financials. It is obvious that the analysts were not impressed by the earnings among the Financials. Too be fair, there is a bit of a mixed picture among the banks, with some like Regions Financial (RF - Analyst Report) doing quite well with 11 increases and only 3 cuts (mean estimate up 26.3%), while seemingly similar firms like SunTrust (STI - Snapshot Report) and KeyCorp (KEY - Analyst Report) are still seeing analysts slash away (15 and 14 cuts respectively, no increases at either and declines of more than 100%)

Also, despite a rally in the price of oil (now almost $58) analysts continue to cut their estimates for the Energy sector. However, some of the biggest cuts in the Energy sector are coming from the Coal firms like CONSOL Energy (CNX - Analyst Report) and Peabody Energy (BTU - Analyst Report).

The Zacks Revisions Ratio: 2010

• Overall picture for 2010 similar to that of 2009
• Revisions ratio up to 0.71 from 0.59
• Telecom and Tech the strongest, Financials the weakest for 2010
• Positive surprises leading to more upward revisions
• Ratio of rising to falling mean estimates rises to 0.54 from 0.50
• Total revisions activity should peak in a few weeks
• Total number of revisions rises to 2,996 from 1,755 (70.7%)
• Estimate increases rise to 1243 from 577 (115.5%), cuts rise to 1,753 from 1,200 (46.1%)

The overall picture for 2010 is similar in outline to that of 2009, but not quite as good, with the revisions ratio rising to 0.71 from 0.59 last week and 0.30 a month ago. Telecom and Tech also lead for 2010, while Financials, Energy and Industrials are continuing to get cut. The Utilities are much weaker for 2010 than they are for 2009. The rise in the total number of estimates has been even more dramatic for 2010 than for 2009, with the number of increases more than doubling in the last week alone.

Earnings Shares and P/Es

• P/Es are too low since earnings estimates are too high
• Earnings Shares, including historical, based on current make up of S&P 500
• Health Care expected to take Earnings crown from Energy in 2009, keep it in 2010
• Energy Earnings Share expected to plunge to 11.8% from 23.6%
• Financials 2009 earnings share expected to rise to 10.2% from -1.7% in 2008.
• Consumer Discretionary market cap share far above earnings shares (overvalued?)
• Health Care Market Cap share well below earnings shares (undervalued?)
• 12-month forward S&P P/E of 14.48 equates to earnings yield of 6.91%, which is very attractive relative to 10-year T-note yield of 3.33%, but only mediocre relative to 5.38% A-rated 10 year corporate.
• T-note rates are rising and more realistic earnings yields of near 5.51% based on lower earnings ($55) means the spread, while still attractive, is not overwhelming.

Neil Malkin contributed significantly to this report.

Data in this report, unless stated otherwise, is through the close on Thursday 5/7/2009

The revisions ratio is simply divides the total number of positive estimate revisions by the total number of estimate cuts. A high ratio is a bullish indicator and a low ratio is bearish. For the S&P 500 as a whole, a number below 0.80 or above 1.25 is generally significant.

With smaller totals for any given sector than the S&P 500 over all, the ratio should be farther away from 1.0 to be truly significant. However, for the sake of consistency, we refer to readings above 1.25 as being in positive territory and below 0.80 as being in negative territory. In the average 4 week change column, we eliminate all firms where the change is either greater than =100% or less than -100%.