A Flood of Estimate Cuts

• 87 or 17.4% of S&P Companies have reported through 10/16 close
• Surprise ratio at 1.79, median surprise at 2.63%, both somewhat below normal
• Median EPS growth at 7.07%, surprisingly good given the economic environment
• Energy (1 firm, up 1050.0%) and Materials (4 firms up 39.5%) doing best in early results
• Financials (Down 48.2%) doing the worst
• Expected Growth of 9.8% for those left to report
• Significant positive surprises: Peabody (BTU - Analyst Report), Wells Fargo (WFC - Analyst Report), Oracle (ORCL - Snapshot Report)
• Significant negative surprises: Progressive (PGR - Analyst Report), Zions Bancorp (ZION - Analyst Report), Harley-Davidson (HOG - Snapshot Report)

Share repurchases were still not very significant in the fourth quarter of last year and the first quarter of this year (the data is not out yet for the second quarter) and the reduction in share count also boosts EPS growth.

Currency translation gains will be less of a factor this quarter due to the rebound in the dollar. However, the strong overseas demand that the previously very weak dollar stimulated will still prove to be a boost to the earnings of many firms. The delay is because in the third quarter they will be shipping goods ordered previously. Given both the rebound in the dollar and the very significant economic slowdown abroad, look for the export boom to fade in the fourth quarter and into 2009.

Total Net Income Growth

• Total net income of those that have reported down 30.5% from last year
• Total reported net income so far $34.7 billion versus $49.9 billion for same firms last year
• Those firms earned $41.1 billion in the second quarter
• Combining results with expectations, earnings now expected to be down 10.1% year over year, which seems very optimistic
• Financials down 97.9% so far, a decline of 78.3% expected when all is said and done
• So far Financials account for 78.3% of total decline in net income
• Six sectors expected to post lower total earnings than a year ago
• Energy is the only sector expected to post robust growth, up 45.6%, Staples is next best -  up 5.2%
• Growth excluding Energy expected to be -19.8%
• Growth excluding Financials expected to be -6.8%
• Expectations for the 4th quarter dropping to +23.8%, but still look very optimistic to me.
• Full year net income in 2009 expected to be 17.8% above 2007 levels. Count me as extremely skeptical.

The Zacks Revisions Ratio: 2008

• Revisions ratio for full S&P 500 down to 0.21, same as last week
• Every sector has had at least 2 cuts for every increase over last four weeks
• Cuts outnumber increases by more than 5:1 in 7 of 10 sectors
• Ratio of firms with rising to falling mean estimates at 0.25, was 0.27
• Total number of revisions (4-week total) up to 1,948 from 1,745 last week
• Increases down to 342 from 304, cuts up to 1,606 from 1,441
• Firms with noteworthy Positive revisions activity: Tesoro (TSO - Analyst Report), Valero (VLO - Analyst Report), Johnson & Johnson (JNJ - Analyst Report), General Mills (GIS - Analyst Report), Union Pacific (UNP - Analyst Report)
• Firms with Negative revisions activity (almost everyone) but especially: Novelus (NVLS - Snapshot Report), XL Capital (XL - Analyst Report), JP Morgan (JPM - Analyst Report), Citigroup (C - Analyst Report), and Abercrombie & Fitch (ANF - Analyst Report)

To help gauge the direction of the market, we take note of what analysts are thinking. By tallying their EPS changes, we can determine our revisions ratio. This ratio simply divides the total number of positive estimate revisions by the total number of estimate cuts. Thus, 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.

The Zacks Revisions Ratio: 2009

• Full S&P 500 2009 revisions ratio down to 0.14 from 0.19
• More than 7 cuts per increase for 7 sectors
• Health Care the "best" at a 0.40 reading
• Ratio of rising to falling mean estimates down to 0.17 from 0.19
• Total number of revisions up to 1,805 from 1,585 on Tuesday
• Increases down to 221 from 235, cuts up to 1,584 from 1,350
• Only thing holding up 2009 expected growth is the decline of 2008 base
• Noteworthy positive companies: Southwest Airlines (LUV - Snapshot Report), Gamestop (GME - Analyst Report), Nike (NIKE - Analyst Report), Kimberly-Clark (KMB - Analyst Report), Abbott (ABT - Analyst Report)
• Most firms negative, but particularly AT&T (T - Analyst Report) , Intel (INTC - Analyst Report), Morgan Stanley (MS - Snapshot Report), Marriot (MAR - Analyst Report), and General Electric (GE - Analyst Report)

Market Cap versus Total Earnings

• S&P 500 down to 11.5x 2008, and 9.5x 2009 currently expected earnings
• Real P/E’s are higher since the "E" is still way to high
• Financials expected to get 8.4% of total S&P earnings in 2008, down from 21.5% in 2007, rebound to 16.0% expected for 2009, currently represent 14.8% of total market cap
• Energy’s share expected to grow to 21.8% of total in 2008 from 15.6% in 2007, expected to recede to 19.3% in 2009. Sector represents just 11.8% of the index market cap
• Energy P/E by far the lowest for both 2008 and 2009

When making investment decisions, growth should always be looked at in conjunction with how much you are paying for a stock. Thus, it makes sense to look at the total earnings expected for a sector, relative to that sector’s total market capitalization. This is basically a variation on looking at the P/E.

Neil Malkin contributed significantly to this report.

Data in this report, unless stated otherwise, is through the close on Thursday 10/16/2008