Earnings Season Slow Out of the Gate

Key Points:

• Still very early, but the Fourth Quarter earnings season is off to a shaky start. Total reported earnings growth of just 1.04% for the 29 S&P 500 firms that have reported so far. Ex-Financials growth is down 0.83% year over year. Total revenue growth 7.20%, 7.16% ex-Financials. Median earnings surprise 0.00% and median sales surprise 0.11%.
• Sharp slowdown from the 10.6% earnings and 10.3% revenue growth those same 29 firms reported in the third quarter.
• For remaining 471 firms, year-over-year growth expected to slow to 2.14% in fourth quarter, 2.36% excluding Financials. Down 6.14% sequentially, 6.93% decline expected ex-Financials. Dramatic slowdown, but easy hurdle to clear. Revenue growth expected to slow to 3.31%, 7.62% ex-Financials. Sequentially, revenue to fall 0.54%, and rise 1.84% ex-Financials. Net margin to fall to 8.98% from 9.08% a year ago.
• Full-year total earnings for the S&P 500 jumps 46.6% in 2010, expected to rise 13.9% further in 2011. Growth to continue in 2012 with total net income expected to rise 9.9%. Financials major earnings driver in 2010. Excluding Financials growth was 28.2% in 2010, and expected to be 17.5% in 2011 and 7.4% in 2012.
• Total revenues for the S&P 500 rise 7.94% in 2010, expected to be up 5.93% in 2011, and 8.30% in 2012. Excluding Financials, revenues up 9.34% in 2010, expected to rise 9.67% in 2011 and 7.94% in 2012.
• Annual Net Margins marching higher, from 5.88% in 2008 to 6.27% in 2009 to 8.51% for 2010, 9.15% expected for 2011 and 9.33% in 2012. Margin expansion major source of earnings growth. Net margins ex-Financials 7.79% in 2008, 6.93% in 2009, 8.12% for 2010, 8.71% expected in 2011, but fall to 8.66% in 2012.
• Revisions ratio for full S&P 500 at 0.52 for 2011 (very bearish), at 0.60 for 2012 (bearish). Ratio of firms with rising to falling mean estimates at 0.53 for 2011 (bearish), 0.64 (bearish) for 2012. Total revisions activity past seasonal low and rising fast.
• S&P 500 earned $538.6 billion in 2009, rising to $789.2 billion in 2010, expected to climb to $897.2 billion in 2011. In 2012 the 500 are collectively expected to earn $985.4 billion.
• S&P 500 earned $56.79 in 2009: $83.20 in 2010 and $94.77 in 2011 expected bottom up. For 2012, $104.14 expected. Puts P/Es at 15.57 for 2010, and 13.67x for 2011 and 12.44x for 2012, very attractive relative to 10-year T-note rate of 1.85%. Top-down estimates, $96.85 for 2011 and $102.55 for 2012. Early 2013 estimates $115.75 top down, $116.81 bottom up.

The Earnings Picture

Third quarter earnings season was a good one, but unfortunately we may not be able to say the same about the fourth quarter. While it is still way too early to draw any firm conclusions, only 29 firms of the S&P 500 (5.2%) have reported, the median surprise is 0.00% and the surprise ratio is just 1.40.

Normally, when all is said and done, the median runs about 3% and the ratio about 3.0. While we don’t have the drama of multi-billion dollar bank losses, this is the weakest start to an earnings season since the depths of the Great Recession. In most recent quarters, we have started out of the gate much faster than that, only to fade toward lower levels.

If we are going to have a “normal season” we will have to see the later reporting firms come in stronger than the early reporters. Total net income for the 29 that have reported is just 1.04% higher than a year ago -- a sharp slowdown from the 10.6% growth those same 29 firms reported in the third quarter.

The bar is also set low for the remaining 471 firms. They are expected to see year-over-year growth of just 2.14%, or 2.36% if we exclude the Financial sector. That is far below the 15.0% total and 18.4% ex-Financial growth those 471 reported in the third quarter. In other words, we have started out very weak, and it is not expected to get much better.

Revenue Growth Holding Up

Revenue growth has held up better, with the 29 reporting 7.20% growth, and 7.16 if we exclude the one Financial that has reported (J.P. Morgan { ( JPM - Analyst Report ) } reported on Friday, in line on earnings but disappointing on revenues, but the cut-off for this data is Thursday night).

The 471 are expected to see revenue growth to slow to 3.31% in total, and 7.62% excluding the Financials. With revenue growth slowing but holding up better than net income growth, it means that the net margin expansion game is coming to an end. It has been a very big part of the spectacular earnings growth that we have seen coming out of the Great Recession.

For the 29 already reported, net margins have come in at 6.34%, down from 6.76% a year ago, and 6.81% in the third quarter. For the 471, margins are expected to be higher, but also fall to 8.98% from 9.08% last year, and well below the 9.52% in the third quarter. Excluding Financials the picture is even worse, with net margins of just 8.47% expected, down from 8.90% a year ago and 9.26% in the third quarter.

Net Margin Expansion Over?

While in an absolute sense, those are still very healthy net margins -- much higher than the average of the last 50 years or so -- they are no longer expanding. Then again, it was unrealistic to expect that they would always rise. It does mean that earnings growth is going to be harder to come by going forward.

On an annual basis, net margins continue to march northward. In 2008, overall net margins were just 5.88%, rising to 6.27% in 2009. They hit 8.51% in 2010 and are expected to continue climbing to 9.15% in 2011 and 9.33% 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 6.93% in 2009, but have started a robust recovery and rose to 8.12% in 2010. They are expected to rise to 8.71% in 2011. However, they are expected to drop to and 8.66% in 2012.

Total Revenues in Right Direction

Total net income rose to $789.0 billion in 2010, up from $538.6 billion in 2009. The expectations for full year 2011 are very healthy. The total net income for the S&P 500 should be $898.6 billion, or increases of 46.6% and 13.9%, respectively.

The expectation is for 2012 to have total net income come close to $1 Trillion mark to $987.2, for growth of 9.9%. Consider those earnings relative to nominal GDP. If we use the middle of the year GDP level, S&P 500 net income has climbed from 3.89% in 2009 to 5.45% in 2010, and assuming that the 2011 expectations are on target, 6.02% in 2011.

Of course, the S&P 500 earns a lot of its income abroad, and there are a lot more than 500 companies in the U.S. so to some extent that is an apples to oranges comparison. It is somewhat ironic that the growth in earnings was robust when the economy was anemic, but now that the economy seems to be picking up, earnings growth is slowing down dramatically.

Europe, however, is falling back into recession, and even if the Euro does not totally fall apart, its descent is likely to be a deep and nasty one. The BRICs have also all shown signs of slower -- but still robust by developed country standards -- growth.

A much broader measure of (domestic only) corporate profits tracked by the government rose to 9.92% of GDP in the third quarter. Since 1959 (when the data starts), that measure has averaged 5.99% of GDP. It is still not a record, though -- that was set in the third quarter of 2006 at 10.29% of GDP. Meanwhile, wages fell to a record low of just 43.75% of GDP, while the average since 1959 is 48.42% of GDP.

Higher profits are great for the stock market, but ultimately companies need customers, and their customers need to have income (or borrowing capacity). Thus there has to be a very real question about the sustainability of these great earnings. I don’t think it is wise to assume that corporate profits will continue to take an ever larger share of the economic pie.

S&P "EPS" Expected to Top $100 in 2012

The “EPS” for the S&P 500 is expected to be over the $100 “per share” level for the first time at $104.14 in 2012. That is up from $56.79 for 2009, $83.20 for 2010 and $94.77 for 2011. In an environment where the 10-year T-note is yielding 1.85%, a P/E of 15.6x based on 2010 and 13.7x based on 2011 earnings looks attractive. The P/E based on 2012 earnings is just 12.4x.

Estimate revisions activity is past its seasonal low, and should at least triple from here by early to mid-February. We saw a little bit of a bounce in the ratio of upwards to downwards revisions during the third quarter earnings season, especially for this year, but now that bounce seems to be over.

More Cuts Than Increases

Once again, there are more estimate cuts than increases, with a 0.52 ratio. That is almost two estimate cuts for every increase. That is now well into bearish territory. The situation for 2012 is not a lot better. There the ratio never got above 1.0 during the earnings season, and has now also started dropping again, and currently stands at 0.60. That is also a bearish reading.

At the sector level, with still-low overall revisions activity, the sample sizes are still quite thin, which makes them somewhat less significant, but that does not mean that they should be ignored entirely. For both years, the estimate cuts are very widespread. For 2011, there are just three sectors, Transports, Construction and Aerospace that have seen more upwards than downwards revisions.

For 2012 just one sector -- Transports -- has more increases than cuts, while three have an equal number of increases and cuts. Meanwhile, for 2011 seven sectors, and for 2012 five sectors, have at least two cuts per increase. Autos and Utilities are faring the worst, but on very thin sample sizes.

In Summation

The third quarter was a good one. However, the expectations are very subdued for the fourth quarter, and the hurdle is getting lower. So far, companies are not clearing that low hurdle at anything like the rate they have in the recent past.

Looking ahead to the first quarter, that slowing is expected to continue, with just 3.41% total, and actually falling 3.63% ex-Financial growth expected. Revenue growth in the first quarter is expected to be moderate as well, with total year over year growth of 4.77% and 5.48% excluding the Financials.

While I think long-term valuations are very attractive at these levels, it does not look like the first quarter earnings season will be the catalyst to kick the market into high gear.

Income Surprises

• So far 29 firms, or 5.8%, have reported fourth quarter results. Total Income Growth at 1.04%. We have a 1.40 surprise ratio, and 0.00% median surprise, both extremely weak. Positive surprises for 48.3% of all firms reporting.
• Positive year-over-year growth for 17, falling EPS for 11 firms, 1.55 ratio, 58.3% of all firms reporting have higher EPS than last year.
• Six sectors still without any results, four with just a single firm reporting. To early to draw any conclusions.
• Industrials and Materials lead, Tech and Construction lag in the very early going.

Historically, a “normal earnings season” will have a surprise ratio of about 3:1 and a median surprise of about 3.0%. Early on the ratios and medians can be very volatile. 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
Industrial Products	32.14%	4.55%	18.75	1	0	1	0
Basic Materials	3.92%	12.50%	7.69	2	1	2	1
Finance	46.57%	1.28%	4.40	1	0	1	0
Transportation	35.05%	11.11%	3.29	1	0	1	0
Consumer Discretionary	-9.75%	10.00%	3.09	2	0	1	2
Business Service	16.89%	10.53%	2.38	2	0	2	0
Consumer Staples	-4.85%	8.11%	0.00	1	1	0	3
Retail/Wholesale	0.63%	19.15%	0.00	2	4	5	3
Computer and Tech	-7.43%	6.85%	-3.45	2	3	4	1
Construction	-6.25%	9.09%	-5.88	0	1	na	1
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 500	1.04%	5.80%	0.00	14	10	17	11

Sales Surprises

• Strong revenue growth of 7.20% among the 29 that have reported, median surprise 0.11 (very weak), surprise ratio of 1.07 (very weak). Positive surprise for 51.7%.
• Growing revenues outnumber falling revenues by ratio of 6.25 (very strong), 86.2% have higher sales than last year.
• Still too early to draw conclusions, but not a very good start.
• Construction, Materials, Discretionary and Industrials lead, Tech and Retail lag.

Sales Surprises 4Q Reported
Sales Surprises	Yr/Yr Growth	% Reported	Surprise Median	Sales Surp Pos	Sales Surp Neg	# Grow Pos	# Grow Neg
Construction	10.81%	9.09%	6.402	1	0	1	0
Basic Materials	12.65%	12.50%	3.224	2	1	3	1
Consumer Discretionary	9.74%	10.00%	1.704	2	1	2	0
Industrial Products	8.75%	4.55%	1.62	1	0	1	0
Business Service	16.38%	10.53%	1.053	1	1	2	0
Finance	9.89%	1.28%	0.834	1	0	1	1
Consumer Staples	6.53%	8.11%	0.665	2	1	2	0
Transportation	9.95%	11.11%	-0.137	0	1	1	1
Retail/Wholesale	5.59%	19.15%	-0.227	3	6	8	1
Computer and Tech	3.04%	6.85%	-1.881	2	3	4	na
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 500	7.20%	5.80%	0.112	15	14	25	4

Reported Quarterly Growth: Total Net Income

• The total net income for the 29 that have reported so far is only 1.04% above what was reported in the fourth quarter of 2010, down sharply from 10.55% growth the same 29 firms reported in the third quarter. Excluding Financials, net income down 0.83%, down from positive 6.50% reported in the third quarter.
• Sequential earnings fall 10.71% for the 29 that have reported, down 10.07% ex Financials.
• Growth (for the 29 firms) expected to rebound to 3.41% in the first quarter, but be negative 3.63% ex-Financials.
• Total net income reported (29 firms) $8.95 billion, vs. $8.86 billion year ago, and down from $10.02 billion in third quarter.
• Refer back to % reported in Scorecard to assess significance of the growth rates for sectors.

Quarterly Growth: Total Net Income Reported
Income Growth	"Sequential Q1/Q4 E"	"Sequential Q4/Q3 A"	Year over Year 4Q 11 A	Year over Year 1Q 12 E	Year over Year 3Q 11 A
Finance	-8.07%	-20.09%	46.57%	1.42%	148.84%
Transportation	-14.03%	7.11%	35.05%	66.91%	22.11%
Industrial Products	-10.25%	7.25%	32.14%	12.57%	13.11%
Business Service	-12.72%	2.76%	16.89%	7.65%	31.89%
Basic Materials	109.43%	24.52%	3.92%	-19.94%	67.15%
Retail/Wholesale	59.56%	-14.54%	0.63%	1.48%	5.20%
Consumer Staples	-15.86%	12.43%	-4.85%	2.16%	3.92%
Construction	-61.98%	42.86%	-6.25%	203.70%	-30.00%
Computer and Tech	0.04%	13.38%	-7.43%	-4.70%	-4.00%
Consumer Discretionary	-24.99%	-60.15%	-9.75%	-19.41%	2.49%
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 500	14.05%	-10.71%	1.04%	-3.41%	10.55%
Excluding Financial	15.40%	-10.07%	-0.83%	-3.63%	6.50%

Expected Quarterly Growth: Total Net Income

• Total net income (for the 471 yet to report) is expected to be just 2.14% above what was reported in the fourth quarter of 2010, down from 15.04% growth in the third quarter. Excluding Financials, growth of 2.36%, down from 18.38% reported in the second quarter.
• Relative to the third quarter total net income to fall 6.14%, ex-Financials to fall 6.93%.
• Financials the only sector to see growth accelerate from the third quarter. Six sectors expected to see negative year-over-year growth.
• Eleven sectors expected to earn less in fourth quarter than in the third, eight by double digits.

Quarterly Growth: Total Net Income Expected
Income Growth	Sequential Q1/Q4 E	Sequential Q4/Q3 E	Year over Year 4Q 11 E	Year over Year 1Q 12 E	Year over Year 3Q 11 A
Construction	-30.50%	-29.64%	45.21%	64.04%	67.32%
Oils and Energy	2.03%	-14.35%	18.28%	0.47%	60.06%
Business Services	-4.76%	7.09%	12.61%	16.73%	17.90%
Auto	29.70%	-32.33%	10.95%	-19.40%	22.75%
Transportation	-12.81%	-1.43%	10.16%	16.63%	12.06%
Industrial Products	22.53%	-18.88%	6.40%	11.45%	27.75%
Consumer Discretionary	-11.12%	12.17%	6.10%	7.91%	17.12%
Computer and Tech	-13.42%	9.36%	2.17%	0.77%	10.53%
Finance	7.57%	-1.77%	1.28%	-6.83%	0.01%
Medical	8.34%	-9.99%	0.08%	-1.36%	6.94%
Consumer Staples	-4.98%	-12.18%	-1.02%	2.48%	6.37%
Retail/Wholesale	-21.71%	28.70%	-1.74%	4.03%	8.19%
Utilities	33.35%	-41.26%	-8.17%	-2.33%	9.30%
Aerospace	-5.24%	-10.97%	-8.48%	5.13%	12.44%
Conglomerates	-2.62%	-3.26%	-11.72%	10.48%	16.20%
Basic Materials	40.41%	-27.26%	-13.23%	-5.90%	31.74%
S&P 500	0.12%	-6.14%	2.14%	-0.13%	15.04%
Excluding Financial	-1.35%	-6.93%	2.36%	1.42%	18.38%

Quarterly Growth: Total Revenues Reported

• Revenue growth (for the 29 that have reported) at 7.20%, down from the 10.27% growth posted in the second quarter. Growth ex-Financials 7.16%, down from 10.27%.
• Sharp slowdown despite improving U.S. economy, may reflect Europe and the dollar.
• Sequentially revenues 4.10% lower than in the third quarter, down 4.47% ex-Financials.
• Six sectors yet to report, four with only one in. Take current numbers with big grain of salt.
• Revenue growth significantly stronger than income growth so far.

Quarterly Growth: Total Revenues Reported
Sales Growth	"Sequential Q1/Q4 E"	"Sequential Q4/Q3 A"	Year over Year 4Q 11 E	Year over Year 1Q 12 E	Year over Year 3Q 11 A
Business Service	-7.50%	5.14%	16.38%	7.09%	21.82%
Basic Materials	13.39%	-2.61%	12.65%	5.47%	24.62%
Construction	-9.02%	16.22%	10.81%	55.38%	-0.61%
Transportation	6.20%	0.66%	9.95%	16.39%	11.25%
Finance	-35.27%	28.24%	9.89%	-17.43%	9.89%
Consumer Discretionary	7.84%	-13.50%	9.74%	19.81%	12.90%
Industrial Products	4.81%	0.20%	8.75%	13.86%	10.06%
Consumer Staples	-6.15%	14.70%	6.53%	8.99%	5.49%
Retail/Wholesale	4.42%	-8.80%	5.59%	-1.47%	8.18%
Computer and Tech	14.47%	3.50%	3.04%	17.49%	6.78%
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 500	-4.48%	-4.10%	7.20%	0.42%	10.27%
Excluding Financial	5.31%	-4.47%	7.16%	5.40%	10.27%

Quarterly Growth: Total Revenues Expected

• Revenue growth for the 471 yet to report expected to fall to 1.14%, from the 15.04% growth posted in the second quarter. Growth ex-Financials 2.36%, down from 18.38% in 3rd quarter.
• Sequentially revenues 0.54% lower than in the third quarter, up 1.84% ex-Financials.
• Four sectors expecting revenue growth over 10%, Finance to see sharp 21.8% year-over-year drop in revenues.
• Year-over-year revenue growth in first quarter expected to be 4.77%, up 5.48% ex-Financials.

Quarterly Growth: Total Revenues Expected
Sales Growth	Sequential Q1/Q4 E	Sequential Q4/Q3 E	Year over Year 4Q 11 E	Year over Year 1Q 12 E	Year over Year 3Q 11 A
Oils and Energy	-3.48%	-5.03%	16.17%	-1.74%	32.05%
Transportation	2.99%	2.40%	12.14%	17.40%	13.13%
Consumer Discretionary	-3.74%	7.88%	11.52%	13.07%	15.05%
Construction	9.00%	-3.07%	11.29%	28.50%	8.88%
Industrial Products	14.26%	-6.37%	9.91%	18.31%	18.49%
Utilities	-8.14%	0.18%	9.22%	-4.54%	2.62%
Computer and Tech	-3.46%	6.68%	7.67%	9.92%	11.74%
Basic Materials	12.24%	-3.10%	7.40%	14.41%	18.92%
Retail/Wholesale	-6.55%	11.73%	7.16%	7.34%	8.34%
Auto	6.35%	-2.63%	6.50%	9.58%	17.84%
Business Services	-1.21%	3.14%	5.84%	8.44%	8.90%
Medical	-0.18%	1.41%	4.04%	3.84%	7.02%
Aerospace	-4.92%	7.81%	2.31%	11.55%	-1.04%
Conglomerates	-2.57%	6.89%	1.23%	5.67%	5.64%
Consumer Staples	-1.33%	-8.47%	-4.71%	2.00%	11.25%
Finance	22.03%	-16.16%	-21.77%	0.44%	-0.47%
S&P 500	3.04%	-0.54%	3.31%	4.77%	11.33%
Excluding Financial	-2.27%	1.82%	7.62%	5.48%	13.37%

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 the 29 that have reported fall to 6.34% from 6.73% a year ago, and down from 6.81% in the second quarter. Net margins ex-Financials fall to 6.07% from 6.56% a year ago and 6.45% in the second quarter.
• Final Net Margins will be higher as remaining firms are higher margin businesses, but it looks like the margin expansion game is getting old.
• Margin expansion has been the key driver behind earnings growth. Due to seasonality, it is best to compare to a year ago, particularly at the individual company and sector levels. Mix of companies reporting will lead to big changes in both the reported and expected net margin tables from week to week.

Quarterly: Net Margins Reported
Net Margins	Q1 2012 Estimated	Q4 2011 Reported	Q3 2011 Reported	Q2 2011 Reported	Q1 2011 Reported	4Q 2010 Reported
Finance	33.64%	23.68%	38.01%	28.01%	27.39%	17.76%
Computer and Tech	15.30%	17.51%	15.98%	22.74%	18.86%	19.49%
Business Service	9.07%	9.61%	9.84%	9.67%	9.02%	9.57%
Consumer Staples	8.27%	9.22%	9.41%	8.37%	8.82%	10.32%
Consumer Discretionary	5.59%	8.03%	17.44%	9.45%	8.31%	9.77%
Industrial Products	6.22%	7.26%	6.78%	7.02%	6.29%	5.98%
Basic Materials	11.56%	6.26%	4.89%	12.99%	15.23%	6.78%
Transportation	3.80%	4.69%	4.41%	5.29%	2.65%	3.82%
Construction	1.32%	3.15%	2.56%	1.83%	-1.97%	3.72%
Retail/Wholesale	3.81%	2.49%	2.66%	2.71%	3.70%	2.62%
Medical	na	Na	na	Na	na	Na
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
S&P 500	6.91%	6.34%	6.81%	7.97%	7.52%	6.73%
Excluding Financial	6.66%	6.07%	6.45%	7.67%	7.28%	6.56%

Quarterly Net Margins Expected

• Sector and S&P net margins are calculated as total net income for the sector divided by total revenues for the sector. No data for the 471 that have not reported.
• Net margins expected to fall to 8.98% from 9.08 a year ago, and down from 9.52% in the third quarter. Net margins ex-Financials expected to fall to 8.47% from 8.90% a year ago and down from 9.26% in the second quarter. Is margin expansion coming to an end? Maybe.
• Six sectors see year-over-year margin expansion, ten expected to see contraction.
• Margin expansion the key driver behind earnings growth. Due to seasonality, it is best to compare to a year ago, particularly at the individual company and sector levels. Mix of companies reporting will lead to big changes in both the reported and expected net margin tables from week to week.

Quarterly: Net Margins Expected
Net Margins	Q1 2012 Expected	Q4 2011 Expected	3Q 2011 Reported	2Q 2011 Reported	1Q 2011 Reported	4Q 2010 Reported
Computer and Tech	14.78%	16.48%	16.07%	16.44%	16.12%	17.36%
Finance	11.55%	13.11%	11.19%	9.04%	12.46%	10.12%
Business Service	12.54%	13.01%	12.53%	12.13%	11.65%	12.23%
Medical	13.13%	12.10%	13.63%	13.55%	13.83%	12.58%
Consumer Staples	10.54%	10.95%	11.41%	11.20%	10.49%	10.54%
Consumer Discretionary	8.90%	9.64%	9.27%	9.34%	9.33%	10.13%
Conglomerates	9.43%	9.44%	10.43%	10.10%	9.02%	10.82%
Transportation	7.98%	9.43%	9.79%	9.41%	8.03%	9.60%
Oils and Energy	8.31%	7.86%	8.72%	8.57%	8.13%	7.72%
Industrial Products	8.22%	7.67%	8.85%	8.71%	8.73%	7.92%
Basic Materials	7.29%	5.82%	7.76%	8.66%	8.86%	7.21%
Aerospace	5.79%	5.81%	7.03%	6.88%	6.14%	6.49%
Utilities	8.21%	5.65%	9.64%	8.15%	8.02%	6.72%
Auto	4.89%	4.01%	5.77%	6.62%	6.65%	3.85%
Retail/Wholesale	3.25%	3.88%	3.37%	3.69%	3.36%	4.23%
Construction	1.62%	2.55%	3.51%	3.16%	1.27%	1.95%
S&P 500	8.95%	8.98%	9.52%	9.19%	9.39%	9.08%
Excluding Financial	8.55%	8.47%	9.26%	9.22%	8.89%	8.90%

Annual Total Net Income Growth

• Following rise of just 2.4% in 2009, total earnings for the S&P 500 jumps 46.6% in 2010, 13.9% further expected in 2011. Growth ex-Financials 28.2% in 2010, 17.5% in 2011.
• For 2012, 9.87% growth expected. 7.36% ex-Financials.
• Thirteen sectors expected to see total net income rise in 2011 and all in 2012. Utilities only (small) decliner in 2010. Eight sectors expected to post double-digit growth in 2011 and nine in 2012. Only Utilities, Autos, Energy and Health Care expected to grow less than 5% in 2012. Slow growers in 2011 to be high growers in 2012.
• Cyclical/Commodity sectors expected to lead in earnings growth again in 2011 and into 2012. Materials, Industrials and Energy expected to grow over 30% for second year.
• Sector dispersion of earnings growth narrows dramatically between 2010 and 2012, only Construction and Financials (low base) expected to grow more than 20% in 2012, eight grew more than 30% in 2010.

Annual Total Net Income Growth
Net Income Growth	2009	2010	2011	2012
Construction	- to -	- to +	-11.54%	57.95%
Finance	- to +	324.69%	-2.80%	23.79%
Transportation	-30.21%	80.16%	-4.12%	18.60%
Industrial Products	-34.96%	36.43%	32.42%	17.70%
Business Service	1.47%	13.59%	17.39%	14.13%
Conglomerates	-24.01%	11.13%	8.37%	13.77%
Consumer Discretionary	-15.00%	23.17%	19.70%	13.58%
Retail/Wholesale	2.76%	14.81%	10.32%	12.07%
Basic Materials	-45.93%	55.63%	33.07%	8.35%
Computer and Tech	-4.58%	47.00%	22.78%	8.11%
Consumer Staples	5.46%	11.65%	8.60%	7.84%
Aerospace	-17.55%	21.78%	6.40%	5.16%
Medical	2.45%	10.33%	7.69%	3.70%
Oils and Energy	-54.89%	50.46%	38.27%	2.34%
Utilities	-14.14%	-0.64%	3.51%	1.69%
Auto	- to +	1448.79%	17.55%	1.59%
S&P 500	2.37%	46.51%	13.88%	9.87%

Annual Total Revenue Growth

• Total S&P 500 Revenue in 2010 rises 7.94% above 2009 levels, a rebound from a 5.53% 2009 decline.
• Total revenues for the S&P 500 expected to rise 5.93% in 2011, 7.22% in 2012.
• Industrials, Materials and Energy to lead revenue race in 2011. Four other sectors (all cyclical) also expected to show double-digit revenue growth in 2011.
• All sectors but Staples, Finance and Aerospace expected to show positive top-line growth in 2011, but four sectors expected to show positive growth below 5%. All sectors but Energy see 2012 growth.
• Aerospace the only sector to post lower top line for 2010. Revenues for Financials, Construction, and Conglomerates were virtually unchanged.
• The widespread revenue gains are not consistent with the idea of a double-dip recession, particularly in a low inflation environment.
• Revenue growth significantly different if Financials are excluded, down 10.56% in 2009 but growth of 9.34% in 2010, 9.67% in 2011 and 7.94% in 2012.

Annual Total Revenue Growth
Sales Growth	2009	2010	2011	2012
Construction	-12.08%	0.47%	4.28%	21.99%
Industrial Products	-17.82%	12.34%	19.12%	16.86%
Transportation	-13.65%	15.41%	13.06%	15.38%
Auto	-21.47%	10.70%	14.48%	14.84%
Computer and Tech	2.14%	9.21%	13.14%	14.47%
Basic Materials	-15.26%	10.76%	18.30%	12.82%
Consumer Discretionary	-15.89%	4.10%	12.44%	10.95%
Conglomerates	-13.51%	5.30%	4.52%	10.61%
Retail/Wholesale	2.66%	0.94%	6.72%	8.61%
Aerospace	6.51%	4.81%	-0.61%	8.44%
Consumer Staples	-2.16%	-0.34%	-1.92%	7.84%
Utilities	-6.61%	4.79%	5.41%	6.93%
Finance	-12.25%	2.13%	-16.99%	5.93%
Medical	3.81%	0.09%	5.11%	4.41%
Business Service	-3.61%	11.40%	9.19%	2.24%
Oils and Energy	-6.93%	23.74%	18.81%	-0.85%
S&P 500	-5.57%	7.94%	5.93%	7.72%
Excluding Financial	-10.56%	9.34%	9.67%	7.94%

Annual Net Margins

• Net Margins marching higher, from 5.88% in 2008 to 6.27% in 2009 to 8.51% for 2010, 9.15% expected for 2011. Trend expected to continue into 2012 with net margins of 9.33% expected.
• Financials significantly distort overall net margins. Net margins ex-Financials 7.78% in 2008, 6.93% in 2009, 8.12% for 2010, 8.71% expected in 2011. Expected to fall to 8.66% in 2012.
• Financials net margins soar from -8.42% in 2008 to 14.86% expected for 2012.
• All sectors but Medical and Utilities saw higher net margins in 2010 than in 2009. Thirteen sectors expected to post higher net margins in 2011 than in 2010. Widespread margin expansion currently expected for 2012 as well with 13 sectors expected to post expansion in margins. Utility margins fall each year.
• Sector net margins are calculated as total net income for sector divided by total revenues. However, there are generally fewer revenue estimates than earnings estimates for individual companies.

Annual Net Margins
Net Margins	2009A	2010E	2011E	2012E
Computer and Tech	11.76%	14.97%	16.24%	15.34%
Finance	2.56%	10.86%	12.72%	14.86%
Medical	12.88%	12.75%	13.07%	12.98%
Business Service	9.97%	10.81%	11.62%	12.97%
Consumer Staples	9.68%	10.31%	11.42%	11.42%
Conglomerates	8.19%	9.02%	9.35%	9.61%
Consumer Discretionary	7.27%	8.50%	9.05%	9.26%
Oils and Energy	5.93%	7.22%	8.40%	8.67%
Industrial Products	6.05%	7.35%	8.17%	8.23%
Transportation	5.70%	9.28%	7.87%	8.09%
Basic Materials	5.05%	7.09%	7.98%	7.66%
Utilities	8.10%	7.88%	7.74%	7.36%
Aerospace	4.79%	5.86%	6.27%	6.08%
Auto	0.37%	5.24%	5.38%	4.76%
Retail/Wholesale	2.97%	3.28%	3.39%	3.50%
Construction	-0.55%	2.64%	2.24%	2.90%
S&P 500	6.27%	8.51%	9.15%	9.33%
Excluding Financial	6.93%	8.12%	8.71%	8.66%

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

• Revisions ratio for full S&P 500 at 0.52, down from 0.53 last week, very bearish. Total revisions activity past seasonal low. Thin samples in many sectors.
• Three sectors with revisions ratio above 1.0, one above 2.0. Seven with two cuts per increase or more. Transports and Construction lead, Autos and Utilities very weak, all on small samples though.
• Ratio of firms with rising to falling mean estimates at 0.53, a very bearish reading.
• Total number of revisions (4-week total) past seasonal low at 1,888 up from 1,602 last week (17.9%). Increases at 649 up from 556 (16.7%), cuts at 1,239 up from 1,046 (18.5%).

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
Transportation	0.18	5	3	28	10	2.80	1.67
Construction	0.08	5	4	10	5	2.00	1.25
Aerospace	-0.04	2	3	4	3	1.33	0.67
Consumer Discretionary	-0.5	10	16	43	49	0.88	0.63
Industrial Products	-0.43	5	7	26	31	0.84	0.71
Retail/Wholesale	-1.2	20	25	102	152	0.67	0.80
Conglomerates	-0.5	2	4	12	18	0.67	0.50
Finance	-0.62	24	49	150	234	0.64	0.49
Business Service	-0.3	4	11	20	32	0.63	0.36
Oils and Energy	-2.41	15	26	97	215	0.45	0.58
Computer and Tech	-0.95	17	40	60	154	0.39	0.43
Consumer Staples	-0.45	10	21	19	54	0.35	0.48
Medical	-0.51	15	28	44	132	0.33	0.54
Basic Materials	-2.16	4	14	17	59	0.29	0.29
Utilities	-0.54	9	23	16	78	0.21	0.39
Auto	-0.22	1	4	1	13	0.08	0.25
S&P 500	-0.83	148	278	649	1239	0.52	0.53

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

• Revisions ratio for full S&P 500 at 0.60, down from 0.64 last week, in bearish territory.
• The Revisions ratio for 2012 never rose above 1.0 during earnings season and is now falling again. This is a very troubling sign, and will be more so if it stays low as activity picks up.
• Only Transportation has a positive revisions ratio (above 1.0). Five sectors with more than two cuts per increase. Autos and Utilities very weak, but on small samples.
• Ratio of firms with rising estimate to falling mean estimates at 0.64, down from 0.54 last week. In bearish territory.
• Total number of revisions (4-week total) at 1227, up from 991 (23.8%), past the low for the season. Thin samples for many sectors.
• Increases at 459 up from 385 last week (19.2%), cuts at 768 up from 606 last week (26.7%).

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	0.04	6	3	15	4	3.75	2.00
Industrial Products	-0.63	5	7	18	18	1.00	0.71
Construction	-0.15	4	3	3	3	1.00	1.33
Aerospace	0.00	2	4	3	3	1.00	0.50
Consumer Discretionary	-0.64	10	14	27	29	0.93	0.71
Retail/Wholesale	-1.17	20	24	109	148	0.74	0.83
Conglomerates	-0.42	0	6	6	9	0.67	0.00
Finance	-0.83	22	48	77	122	0.63	0.46
Oils and Energy	-2.33	15	25	56	92	0.61	0.60
Business Service	0.10	8	7	13	23	0.57	1.14
Consumer Staples	-0.26	11	15	18	32	0.56	0.73
Basic Materials	-1.73	8	12	20	42	0.48	0.67
Medical	-0.39	17	26	37	83	0.45	0.65
Computer and Tech	-0.52	21	33	46	106	0.43	0.64
Utilities	-0.87	10	24	10	42	0.24	0.42
Auto	0.61	3	4	1	12	0.08	0.75
S&P 500	-0.77	162	255	459	768	0.60	0.64

Total Income and Share

• S&P 500 earned $538.6 billion in 2009, rising to earn $789.0 billion in 2010, $898.6 billion expected in 2011.
• The S&P 500 total earnings expectations dip below the $1 Trillion mark in 2012 at $987.2 Billion. Finance share of total earnings moves from 5.9% in 2009 to 17.9% in 2010, dip to 15.3% expected for 2011; rebound to 17.2% in 2012, but still well below 2007 peak of over 30%. Energy share also rising going from 11.9% in 2009 to 14.8% in 2011, dip to 13.8% in 2012.
• Medical share of total earnings exceeds market cap share (index weight), but earnings share expected to shrink from 17.3% in 2009 to 11.2% in 2012, down each year.
• Market Cap shares of Construction, Staples, Retail, Transportation and Business Service sectors far exceed earnings shares of any of the years from 2010 through 2012.
• Earnings shares of Energy, Finance, Autos, Materials and Medical well above market cap shares.
• As a general rule, one should try to overweight sectors with rising earnings shares, underweight falling earnings shares, but also over weight sectors where earnings shares exceed market cap shares.

Total Income and Share
Income ($ Bill)	Total Net Income $ 2010	Total Net Income $ 2011	Total Net Income $ 2012	% Total S&P Earn 2010	% Total S&P Earn 2011	% Total S&P Earn 2012	% Total S&P Mkt Cap
Computer and Tech	$135,020	$165,781	$179,218	17.11%	18.45%	18.15%	18.41%
Finance	$141,297	$137,339	$170,008	17.91%	15.28%	17.22%	14.37%
Oils and Energy	$96,418	$133,314	$136,437	12.22%	14.84%	13.82%	11.39%
Medical	$99,136	$106,764	$110,717	12.56%	11.88%	11.22%	10.70%
Consumer Staples	$62,388	$67,754	$73,066	7.91%	7.54%	7.40%	8.91%
Retail/Wholesale	$57,918	$63,894	$71,603	7.34%	7.11%	7.25%	9.04%
Utilities	$48,065	$49,752	$50,595	6.09%	5.54%	5.13%	6.17%
Basic Materials	$24,156	$32,143	$34,826	3.06%	3.58%	3.53%	3.44%
Consumer Discretionary	$25,151	$30,106	$34,194	3.19%	3.35%	3.46%	3.91%
Conglomerates	$27,645	$29,960	$34,084	3.50%	3.33%	3.45%	3.61%
Industrial Products	$16,582	$21,958	$25,844	2.10%	2.44%	2.62%	2.64%
Business Service	$14,144	$16,604	$18,950	1.79%	1.85%	1.92%	2.41%
Transportation	$14,269	$13,682	$16,226	1.81%	1.52%	1.64%	1.92%
Aerospace	$13,543	$14,410	$15,154	1.72%	1.60%	1.54%	1.43%
Auto	$11,394	$13,394	$13,606	1.44%	1.49%	1.38%	1.10%
Construction	$1,911	$1,691	$2,671	0.24%	0.19%	0.27%	0.55%
S&P 500	$789,037	$898,545	$987,200	100.00%	100.00%	100.00%	100.00%

P/E Ratios

• Trading at 15.57x 2010, 13.67x 2011 earnings, or earnings yields of 6.42% and 7.32%, respectively. P/E for 2012 at 12.44x or earnings yield of 8.04%.
• Earnings Yields still attractive relative to 10-year T-Note rate of 1.85% and 30-year bond rate of 2.90%.
• Autos only sector with single-digit P/E for 2012. Energy and Finance close.
• Construction has highest P/E for all three years by a wide margin.
• S&P 500 earned $56.79 in 2009 rising to $83.20 in 2010. Currently expected to earn $94.77 in 2011 and $104.14 for 2012.

P/E Ratios
P/E	2009	2010	2011	2012
Auto	183.61	11.86	10.08	9.93
Oils and Energy	21.83	14.51	10.49	10.25
Finance	53.04	12.49	12.85	10.38
Aerospace	15.79	12.97	12.19	11.59
Medical	14.63	13.26	12.31	11.87
Basic Materials	27.22	17.49	13.15	12.13
Industrial Products	26.70	19.57	14.78	12.55
Computer and Tech	24.62	16.75	13.64	12.62
Conglomerates	17.81	16.02	14.79	13.00
Consumer Discretionary	23.54	19.11	15.97	14.06
Transportation	29.74	16.51	17.22	14.52
Consumer Staples	19.59	17.54	16.15	14.98
Utilities	15.67	15.77	15.23	14.98
Retail/Wholesale	22.01	19.17	17.38	15.51
Business Service	23.77	20.93	17.83	15.62
Construction	NM	35.23	39.83	25.21
S&P 500	22.81	15.57	13.67	12.44

Data in this report, unless stated otherwise, is through the close on Thursday 1/12/2012.

We use the convention of referring to the next full fiscal year to be completed as 2011, not all firms are on December fiscal years, this can cause discontinuities in the data. 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.