Best Earnings Season In Years

Key Points:

• Earnings Surprise ratio (#beat/#miss) at 5.96, almost double normal
• Median Earnings Surprise 7.56%, very strong
• Year over year Earnings Growth ratio (# Pos Growth/# Neg Growth) at 0.66
• Sales Surprise Ratio at 1.54
• Sales Growth Ratio at just 0.41
• Total Net Income for S&P 500 reported so far is 6.1% below what those same 198 firms reported a year ago, 5.4% above what they earned in the 2Q09
• Total S&P 500 Revenues reported so far down 4.7% year over year, up 0.5% from 2Q09
• 2009 Earnings Revisions ratio for full S&P 500 up to 2.48, 2010 ratio at 2.17
• S&P500 expected to earn $560.3 billion in 2008, $699.6 billion in 2010

So far, at least relative to expectations, we are off to a fantastic earnings season. With almost 40% of reports in there have been 155 which have exceeded expectations while only 26 have fallen short, a ratio of almost 6:1. While it is true that most companies will normally try to under-promise and over-deliver, this quarter the beats are beating the misses by about twice the normal margin of 3:1.

Nor have all the surprises only been by a penny or two -- there have been lots of companies that simply crushed the earnings estimates. The median surprise is a very high 7.56%. Over the last five years, a median surprise of about 3.0% has been normal. Part of the reason is that expectations were set very low going into the earnings season.

For most companies, their earnings are still below year-ago levels, just not as far down as people thought they would be. Only 79 firms have posted positive year-over-year growth versus 119 which have fallen short of year ago levels, a ratio of 0.66.

The disparity between firms beating estimates, but having negative year-over-year earnings growth is particularly noticeable in Tech, where the earnings surprise ratio is an awesome 25:1. However, the growth ratio (# of firms with positive growth/# of firms with negative growth) is just 0.52.

A similar situation, but not quite as extreme, is true for Materials. Staples and Medical have been both growing earnings and beating expectations.

On the top line, it has also been a successful season so far relative to expectations, but in terms of actual year-over-year growth it has been downright ugly. The total revenues of the 198 firms that have already reported are 4.7% below year-ago levels. A total of 105 firms have reported higher-than-expected revenues, versus only 68 that have disappointed, for a ratio of 1.54.

On the other hand, only 57 actually had higher sales than a year ago, versus 119 with lower revenues -- a ratio of 0.41. Put another way, only 28.9% of all firms reporting so far have had higher sales than a year ago.

In other words, cost-cutting has been the major force driving earnings. However, the costs to one company are either the revenues of another company, or someone’s paycheck, which is then spent to create revenues for firms.

The strategy seems to be working, as earnings are coming in much better than expected and analysts have responded by increasing earnings estimates for 2009. The estimate increases are widespread across sectors, with six sectors seeing more than four increases for each cut, while only two sectors, Utilities and Aerospace, seeing more cuts than increases. Then again, there have been no reports yet for those two sectors.

For the S&P 500 as a whole the revisions ratio now stands at 2.48 -- its highest level in over a year and in distinct contrast to earlier in the year when it fell below 0.15 at one point. The better-than-expected earnings are translating into estimate increases for 2010 as well as 2009, with a revisions ratio of 2.17 for next year.

Scorecard & Earnings Surprise

• Reports coming in fast, 198, or 39.6% of reports in
• Data presented reflects only firms that have reported so far
• Early reports extremely positive
• Earnings Surprise ratio (#beat/#miss) at 5.96
• Tech almost perfect with 25 beats and 1 miss, Medical strong at 18 to 1
• Median Earnings Surprise 7.56%, very strong reading
• More than half of reports in for six sectors
• Year over year Earnings Growth ratio (# Positive Growth/# Negative Growth) at 0.66
• Massive positive surprises in cyclical Materials, Industrial and Discretionary sectors

In evaluating the data presented here, keep the percent reported in mind; for some sectors the sample size is extremely small. The move to the 16 Zacks sectors means that even when all reports are in, some of the sectors will still have relatively few firms in them. For firms with only a few reports in, the median surprise will be very volatile as new firms are added to the sample.

Also keep in mind that the consensus is generally tighter for defensive sectors like Staples and Medical than for cyclical sectors like Materials, thus a 8.96% median surprise for Staples might be more significant than a 12.71 median surprise for Discretionary. Both, however, are impressive.

Overall, Tech appears to have the most impressive performance so far this quarter on the surprise front, with a 25:1 surprise ratio and a 7.69% median surprise, although strong arguments could be made for several other sectors. Some of the more impressive Tech earnings surprises include Apple (AAPL - Analyst Report), Micron Technology (MU - Snapshot Report) and SanDisk (SNDK - Analyst Report).

Basic Materials has had the biggest positive surprises, with Dow Chemical (DOW - Analyst Report) and Freeport McMoRan (FCX - Analyst Report) particularly impressive.

Scorecard & Earnings Surprise
Income Surprises	Yr/Yr Growth	Surprise Median	% Reported	EPS Surp Pos	EPS Surp Neg	# Grow Pos	# Grow Neg
Consumer Staples	-1.97%	8.96	37.78%	16	1	12	5
Consumer Discretionary	119.98%	12.71	36.67%	9	1	1	10
Retail/Wholesale	9.65%	4.24	31.11%	10	4	6	8
Medical	4.63%	3.53	51.11%	18	1	19	4
Auto	3.85%	3.08	16.67%	1	0	0	1
Basic Materials	54.16%	25.35	50.00%	9	1	2	8
Industrial Products	30.22%	23.63	36.36%	8	0	1	7
Construction	-23.40%	11.85	27.27%	2	1	2	1
Conglomerates	-0.91%	15.24	66.67%	6	0	0	6
Computer and Tech	12.82%	7.69	42.17%	25	1	12	23
Aerospace	-79.24%	8.57	70.00%	5	2	3	4
Oils and Energy	1.42%	4.84	22.50%	6	3	1	8
Finance	9.04%	14.81	52.56%	30	9	19	22
Utilities	18.45%	-0.5	5.41%	1	1	0	2
Transportation	10.30%	3.94	80.00%	6	1	1	7
Business Service	-2.53%	11.11	22.22%	3	0	0	3
S&P	5.44%	7.56	39.60%	155	26	79	119

Sales Surprises

• Sales Surprise Ratio at 1.54
• Staples missing on Sales even as the beat on earnings
• Tech looks terrific, 4:1 positive sales surprise ratio
• Sales Growth Ratio at just 0.41
• Most Tech firms have declining sales, but less of a drop than expected
• Only 28.8% of all firms reporting so far have higher revenues than last year

Sales Surprises	Yr/Yr Growth	Surprise Median	% Reported	Sales Surp Pos	Sales Surp Neg	# Grow Pos	# Grow Neg
Consumer Staples	0.75%	-0.68	37.78%	7	9	5	12
Consumer Discretionary	14.61%	0.11	36.67%	6	5	0	11
Retail/Wholesale	6.81%	-0.02	31.11%	7	7	7	7
Medical	1.35%	0.44	51.11%	16	7	16	6
Auto	2.84%	0.67	16.67%	1	0	0	1
Basic Materials	4.56%	0.65	50.00%	6	4	0	10
Industrial Products	-1.08%	-0.25	36.36%	4	4	0	8
Construction	-1.49%	1.1	27.27%	2	1	0	3
Conglomerates	-0.63%	0.02	66.67%	3	3	0	6
Computer and Tech	3.74%	2.43	42.17%	28	7	7	28
Aerospace	-1.96%	-2.01	70.00%	3	4	5	2
Oils and Energy	3.26%	0.64	22.50%	5	4	1	8
Finance	-6.65%	2.09	52.56%	14	3	16	25
Utilities	9.22%	-20.51	5.41%	0	2	0	2
Transportation	3.97%	-0.81	80.00%	2	6	0	8
Business Service	-0.52%	-0.31	33.33%	1	2	0	3
S&P	0.51%	0.54	39.60%	105	68	57	140

Reported Quarterly Growth: Total Net Income

• Massive growth in Financials due to low year ago base, earnings up 9.0% from 2Q09
• Will be a more extreme issue in the fourth quarter
• Total Net Income for S&P 500 reported so far is 6.1% below what those same 198 firms reported a year ago, 5.44% above what they earned in the 2Q09
• Year over year growth sharply negative for Materials in 3Q, expected to turn very positive in 4Q

Income Growth	Sequential Q4/Q3 E	Sequential Q3/Q2 A	Year over Year 3Q 09 A	Year over Year 4Q 09 E	Year over Year 2Q 09 A
Consumer Staples	-14.32%	-1.97%	3.02%	-4.10%	14.34%
Consumer Discretionary	-51.16%	119.98%	-25.23%	-23.82%	-41.78%
Retail/Wholesale	-7.75%	9.65%	-2.91%	1.63%	-7.28%
Medical	-6.95%	4.63%	3.10%	-4.47%	0.92%
Auto	-26.00%	3.85%	-17.56%	-9.18%	-21.80%
Basic Materials	-32.10%	54.16%	-33.23%	103.63%	-68.75%
Industrial Products	-22.64%	30.22%	-41.34%	-37.06%	-60.82%
Construction	-204.01%	-23.40%	26.32%	-123.70%	-54.15%
Conglomerates	-9.99%	-0.91%	-23.82%	-20.58%	-31.24%
Computer and Tech	17.65%	12.82%	-4.09%	21.31%	-16.65%
Aerospace	380.91%	-79.24%	-78.04%	11.82%	-1.04%
Oils and Energy	-2.05%	1.42%	-52.54%	-36.71%	-51.76%
Finance	-41.40%	9.04%	62.24%	46.35%	-12.63%
Utilities	-21.55%	18.45%	-7.46%	-3.45%	-10.13%
Transportation	6.91%	10.30%	-35.44%	-27.23%	-34.19%
Business Service	0.75%	-2.53%	-32.16%	-25.76%	-32.19%
S&P	-8.69%	5.44%	-6.06%	61.28%	-17.05%

Reported Quarterly Growth: Total Revenues

• Total S&P 500 Revenues down 4.68% year over year, up 0.51% from 2Q09.
• Year over year revenue expected to turn positive in 4Q with 4.4% increase
• Consumer Discretionary revenue growth up 14.6% from 2Q09, but down 14.3% from year ago
• Seasonality can greatly affect sequential growth, but year ago was unusual and may be distorting year over year figures
• Four sectors posting positive yr/yr revenue growth so far, 12 sectors negative

Sales Growth	Sequential Q4/Q3 E	Sequential Q3/Q2 A	Year over Year 3Q 09 A	Year over Year 4Q 09 E	Year over Year 2Q 09 A
Consumer Staples	-13.17%	0.75%	-2.43%	-12.83%	-3.42%
Consumer Discretionary	-2.53%	14.61%	-14.27%	-9.07%	-18.95%
Retail/Wholesale	1.91%	6.81%	1.21%	2.99%	0.50%
Medical	4.78%	1.35%	2.05%	6.53%	-0.27%
Auto	-8.48%	2.84%	-9.54%	-5.32%	-11.76%
Basic Materials	1.06%	4.56%	-28.45%	3.86%	-36.20%
Industrial Products	4.41%	-1.08%	-30.21%	-21.73%	-32.82%
Construction	-5.04%	-1.49%	-21.73%	-22.61%	-19.34%
Conglomerates	5.11%	-0.63%	-16.23%	-8.52%	-17.04%
Computer and Tech	6.18%	3.74%	-3.93%	1.93%	-8.42%
Aerospace	6.65%	-1.96%	4.38%	14.77%	0.83%
Oils and Energy	3.69%	3.26%	-29.40%	-14.22%	-27.46%
Finance	-6.38%	-6.65%	12.87%	36.31%	20.05%
Utilities	23.85%	9.22%	-20.84%	20.24%	-15.52%
Transportation	4.33%	3.97%	-18.82%	-8.89%	-20.11%
Business Service	1.34%	-0.52%	-22.50%	-13.68%	-25.77%
S&P	0.42%	0.51%	-4.68%	4.36%	-5.38%

Annual Total Net Income Growth

• Total S&P 500 Net Income in 2009 expected to be 7.6% 2008 levels
• Total earnings for the S&P 500 expected to jump 23.6% in 2010, 11.4% further in 2011
• Data for 2011 is still thin, so take with a grain of salt
• Medical and Business Service only sectors to see positive growth, although Finance is moving from a loss to a profit and Construction will have a much smaller loss than in 2008

EPS Growth	2008	2009	2010	2011
Consumer Staples	-2.51%	-0.11%	11.38%	6.63%
Consumer Discretionary	6.93%	-11.86%	12.71%	15.29%
Retail/Wholesale	6.95%	-5.14%	12.24%	13.28%
Medical	9.64%	2.03%	9.05%	9.15%
Auto	+ to -	-62.23%	- to +	118.61%
Basic Materials	-12.22%	-65.87%	102.03%	27.50%
Industrial Products	7.49%	-38.03%	15.61%	6.55%
Construction	+ to -	-91.14%	- to +	170.75%
Conglomerates	-10.99%	-33.44%	-0.79%	20.99%
Computer and Tech	10.17%	-9.89%	21.16%	-4.65%
Aerospace	13.29%	-17.00%	20.27%	7.60%
Oils and Energy	20.42%	-57.58%	46.98%	25.02%
Finance	+ to -	- to +	58.69%	44.14%
Utilities	5.04%	-1.96%	10.15%	9.34%
Transportation	3.71%	-32.00%	22.86%	19.08%
Business Service	14.05%	0.78%	13.40%	22.18%
S&P	-23.47%	-7.55%	24.86%	15.68%

Annual Total Revenue Growth

• Total S&P 500 Revenue in 2009 expected to be 9.8% 2008 levels
• Total revenues for the S&P 500 expected to rise 6.5% in 2010
• For 2009, revenues fall more than earnings, for 2010, earnings rise faster than sales, both mean big margin expansion
• Energy, Autos, Materials and Construction see biggest revenue declines in 2009, but will see largest increases in 2010

Sales Growth	2008	2009	2010
Consumer Staples	1.74%	-9.03%	2.71%
Consumer Discretionary	5.22%	-10.18%	3.34%
Retail/Wholesale	6.17%	3.70%	5.07%
Medical	8.55%	4.13%	4.63%
Auto	-8.23%	-26.37%	6.87%
Basic Materials	11.50%	-24.64%	13.11%
Industrial Products	10.76%	-16.55%	4.49%
Construction	-25.81%	-23.32%	9.62%
Conglomerates	6.32%	-14.16%	-0.30%
Computer and Tech	6.60%	-4.76%	5.65%
Aerospace	2.26%	6.61%	1.76%
Oils and Energy	24.34%	-38.69%	26.10%
Finance	-22.57%	7.77%	-1.69%
Utilities	9.55%	-2.36%	5.14%
Transportation	8.09%	-16.22%	7.06%
Business Service	8.89%	-10.14%	3.95%
S&P	4.27%	-9.81%	6.53%

Revisions: Earnings

The Zacks Revisions Ratio: 2009

• Revisions ratio for full S&P 500 up to 2.31, from 1.85
• Positive surprises translating to estimate increases for 2009
• Six sectors seem more than 4 estimate increases for each cut
• Only Utilities and Aerospace seeing estimates cut on balance
• Utilities and Aerospace continue to see estimates cut
• Ratio of firms with rising to falling mean estimates climbs to 2.01 from 1.90
• Total number of revisions (4 week total) up to 2,434 from 2,099 last week (16.0%)
• Increases up to 1,734 from 1,465 (18.4%), cuts up to 700 from 634 (10.4%)
• Total Revisions activity will rise dramatically over next few weeks

Analysts are responding to better than expected 3Q earnings by raising 2009 estimates almost across the board. Unlike the data presented above for the surprises, the revisions data is for all 500 firms in the index. Total revisions activity has picked up dramatically, and will continue to do so over the next few weeks, it always happens during earnings season.

The broad increases in earnings estimates seems to reflect a much better short term outlook for the economy. Note that some of the most cyclical areas such as Retailers, Materials and Autos are seeing a large preponderance of upward over downward earnings revisions, and that most of the firms in those sectors are seeing their consensus estimates increase. On the other hand, the defensive Staples sector has a very high revisions ratio of 7.43, so it's not just the cyclicals.

Sector	%Ch Curr Fiscal Yr Est - 4 wks	# Firms Up	# Firms Down	# Ests Up	# Ests Down
Revisions Ratio	Firms up/down
Consumer Staples	2.43	35	5	171	23
7.43	7.00
Consumer Discretionary	2.81	22	5	116	32
3.63	4.40
Retail/Wholesale	1.68	36	8	235	53
4.43	4.50
Medical	0.24	25	16	127	65
1.95	1.56
Auto	3.37	4	2	19	9
2.11	2.00
Basic Materials	4.61	16	3	60	14
4.29	5.33
Industrial Products	6.17	15	5	45	14
3.21	3.00
Construction	-4.49	5	4	17	12
1.42	1.25
Conglomerates	10.43	6	2	16	3
5.33	3.00
Computer and Tech	5.4	48	21	343	73
4.70	2.29
Aerospace	-4.41	3	7	13	40
0.33	0.43
Oils and Energy	0.53	25	16	155	108
1.44	1.56
Finance	-0.61	45	29	347	189
1.84	1.55
Utilities	-0.34	10	21	20	41
0.49	0.48
Transportation	0.01	5	4	38	22
1.73	1.25
Business Service	-0.27	3	3	12	2
6.00	1.00
S&P	1.75	303	151	1,734	700
2.48	2.01

Revisions: Earnings

The Zacks Revisions Ratio: 2010

• Revisions ratio for full S&P 500 rises to 2.17, from 2.01
• Positive surprises translating to estimate increases for 2010, as well as 2009
• Six sectors seem more than 4 estimate increases for each cut
• Ratio of firms with rising estimate to falling mean estimates at 1.97

Sector	%Ch Next Fiscal Yr Est - 4 wks	# Firms Up	# Firms Down	# Ests Up	# Ests Down
Revisions Ratio	Firms up/down
Consumer Staples	-0.1	32	8	129	21
6.14	4.00
Consumer Discretionary	1.72	20	7	100	32
3.13	2.86
Retail/Wholesale	1.66	30	13	198	46
4.30	2.31
Medical	0.38	28	13	115	80
1.44	2.15
Auto	11.56	5	0	13	4
3.25	-
Basic Materials	5.99	17	1	54	12
4.50	17.00
Industrial Products	1.45	17	3	48	9
5.33	5.67
Construction	-5.88	6	4	20	13
1.54	1.50
Conglomerates	0.16	4	5	12	7
1.71	0.80
Computer and Tech	8.72	53	18	307	72
4.26	2.94
Aerospace	-1.38	4	6	19	40
0.48	0.67
Oils and Energy	-0.04	25	16	149	108
1.38	1.56
Finance	-3.05	40	37	258	184
1.40	1.08
Utilities	-1.95	12	18	23	33
0.70	0.67
Transportation	0.85	6	2	20	15
1.33	3.00
Business Service	-0.67	4	3	15	6
2.50	1.33
S&P	1.39	303	154	1,480	682
2.17	1.97

Total Income and Share

• S&P500 expected to earn $560.3 billion in 2008, $699.6 billion in 2010
• Excluding Financials, total net income expected to be down 21,3% in 2009
• Energy Share of total earnings plunges to 10.9% in 2009 from 23.7% in 2008
• Finance share of total earnings moves from deficit in 2008 to 11.5% in 2009, 14.6% in 2010
• Medical share of total earnings far exceeds market cap share (index weight)

Sector	Total Net Income $ 2008	Total Net Income $ 2009	Total Net Income $ 2010	% Total S&P Earn 2008	% Total S&P Earn 2009
% Total S&P Earn 2010
Consumer Staples	$54,720.45	$54,657.57	$60,879.05	9.03%	9.76%
8.70%
Consumer Discretionary	$34,583.57	$30,481.36	$34,356.49	5.71%	5.44%
4.91%
Retail/Wholesale	$56,337.43	$53,439.34	$59,978.94	9.30%	9.54%
8.57%
Medical	$87,658.88	$89,435.37	$97,526.74	14.46%	15.96%
13.94%
Auto	($6,224.63)	($2,351.35)	$3,393.67	-1.03%	-0.42%
0.49%
Basic Materials	$21,363.91	$7,291.28	$14,730.56	3.53%	1.30%
2.11%
Industrial Products	$18,590.85	$11,521.43	$13,320.40	3.07%	2.06%
1.90%
Construction	($3,093.90)	($273.99)	$1,168.71	-0.51%	-0.05%
0.17%
Conglomerates	$32,723.93	$21,780.53	$21,608.32	5.40%	3.89%
3.09%
Computer and Tech	$125,886.93	$113,437.77	$137,436.88	20.77%	20.25%
19.65%
Aerospace	$15,635.03	$12,976.58	$15,606.52	2.58%	2.32%
2.23%
Oils and Energy	$143,581.39	$60,904.51	$89,520.17	23.69%	10.87%
12.80%
Finance	($23,708.03)	$64,491.55	$102,344.47	-3.91%	11.51%
14.63%
Utilities	$30,484.75	$29,450.66	$32,031.23	5.03%	5.26%
4.58%
Transportation	$13,971.50	$9,501.15	$11,673.37	2.31%	1.70%
1.67%
Business Service	$3,513.65	$3,541.06	$4,015.59	0.58%	0.63%
0.57%
S&P 500	$606,025.72	$560,284.82	$699,591.09	100.00%	100.00%
100.00%

P/E Ratios

• S&P 500 trading at 17.9x 2009 earnings, or an earnings yield of 5.59%
• Trading at 14.3x 2010, 12.4x 2011 earnings, or earnings yields of 6.99% and 8.06, respectively
• Medical has lowest P/E based on both 2009 and 2010 eanings

P/E	2008	2009	2010	2011
Consumer Staples	2.43	35	5	171
Consumer Discretionary	2.81	22	5	116
Retail/Wholesale	1.68	36	8	235
Medical	0.24	25	16	127
Auto	3.37	4	2	19
Basic Materials	4.61	16	3	60
Industrial Products	6.17	15	5	45
Construction	-4.49	5	4	17
Conglomerates	10.43	6	2	16
Computer and Tech	5.4	48	21	343
Aerospace	-4.41	3	7	13
Oils and Energy	0.53	25	16	155
Finance	-0.61	45	29	347
Utilities	-0.34	10	21	20
Transportation	0.01	5	4	38
Business Service	-0.27	3	3	12
S&P	1.75	303	151	1,734

Data in this report, unless stated otherwise, is through the close on Thursday, 10/22/2009.