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Key Points:

• The Fourth Quarter earnings season is weak, but getting better as it progresses.  Total reported earnings growth is 5.59% for the 290 firms of the S&P 500 (56.0%) that have reported so far, but those represent 72.8% of total expected earnings.  Ex-Financials growth is 7.76% year over year.  Total revenue growth 7.59%, 9.67% ex-Financials.  Median earnings surprise 1.92% and median sales surprise 0.18%.  Net margins reported fall to 9.84% from 10.03% last year.
• A sharp slowdown from the 18.25% earnings, and 12.35% revenue growth those same 290 firms reported in the third quarter.
• For remaining 290 firms, year over year growth is expected to slow to 1.74% in fourth quarter, negative 3.76% excluding Financials.  Up 4.46% sequentially, 5.49% decline expected ex-Financials.  A dramatic slowdown, but an easy hurdle to clear.  Revenue growth expected to slow to negative 0.94%, +6.06% ex-Financials.  Sequentially, Revenue to fall 1.16%, and rise 3.42% ex-Financials.  Remaining net margin to rise to 7.21% from 7.02% a year ago.
• Full-year total earnings for the S&P 500 jumps 46.5% in 2010, expected to rise 13.3% further in 2011.  Growth to continue in 2012 with total net income expected to rise 10.6%.  Financials a major earnings driver in 2010.  Excluding Financials, growth was 28.2% in 2010, and expected to be 17.2% in 2011 and 8.2% in 2012.
• Total revenues for the S&P 500 rise 7.94% in 2010, expected to be up 7.01% in 2011, and 7.75% in 2012.  Excluding Financials, revenues up 9.34% in 2010, expected to rise 10.36% in 2011 and 8.54% in 2012.  
• Annual Net Margins marching higher, from 5.88% in 2008 to 6.27% in 2009 to 8.51% for 2010, 9.00% expected for 2011 and 9.24% in 2012.  Margin expansion a major source of earnings growth.  Net margins ex-Financials 7.79% in 2008, 6.93% in 2009, 8.12% for 2010, 8.63% expected in 2011, but fall to 8.60% in 2012.
• Revisions ratio for full S&P 500 at 0.57 for 2011 (very bearish), at 0.64 for 2012 (bearish).    Ratio of firms with rising to falling mean estimates at 0.56 for 2011 (bearish), 0.61 (bearish) for 2012.  Total revisions activity past seasonal low and rising fast.
• S&P 500 earned $538.6 billion in 2009, rising to $788.8 billion in 2010, expected to climb to $893.5 billion in 2011.  In 2012, the 500 are collectively expected to earn $988.0 billion.  
• S&P 500 earned $56.79 in 2009: $83.21 in 2010 and $94.21 in 2011 expected bottom up.  For 2012, $104.05 expected.  Puts P/E’s at 15.93 for 2010, and 13.07x for 2011 and 12.72x for 2012, very attractive relative to 10-year T-note rate of 1.83%.  Top down estimates, $96.85 for 2011 and $102.55 for 2012.  Early 2013 estimates $107.00 top down, $116.28 bottom up.  

The Earnings Picture

Third quarter earnings season was a good one, unfortunately we may not be able to say the same about the fourth quarter.  We got off to a very weak start, and while the last week was better, it just pushed the season from being very poor to mediocre at best.  

So far 290, or 56.0% of the firms have reported.  However, assuming that all the remaining firms report exactly in line with expectations, then 72.8% of all earnings are in.  Normally, when all is said and done, the median surprise runs about 3.00% and the ratio about 3.0.  So far, the median is at 1.92% and the ratio is 1.93.  Both up from last week, but still well below normal.  

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 towards those levels. This time the reverse is try, but we are running out of real estate to catch up.  Total net income for the 290 that have reported is 5.59% above a year ago.  It is still less than a third the 18.25% growth rate that the same 290 firms reported in the third quarter.

The picture is just a little bit better if we take the Financials out of the picture.   Without them, the year-over-year rise in net income is 7.76%, down from 20.37% growth in the third quarter.  Sequentially, total net income so far is 7.01% below the third quarter, or 4.95% lower ex-Financials.  Last year the sequential growth was 4.14%, and 6.17% ex-Financials.  In other words, the pressure on the growth rate is coming from both the numerator and the denominator.

The bar is also set low for the remaining 210 firms, and significantly lower than the results we have seen so far.  They are expected to see year-over-year growth of just 1.74%.  If we exclude the Financial sector, earnings are expected to be 3.76% below last year’s.  That is far below the 5.90% total and 11.31% ex-Financial growth those 210 reported in the third quarter.  In other words, we have started out weak, and it is expected to get worse.

Revenue growth has held up better, with the 290 reporting 7.59% growth.  Most of the revenue weakness, though, has come from the Financials.  If we exclude the Financials that have reported, revenue is up 9.67% year over year.  The 210 are expected to see revenue growth to slow to negative 0.94% in total and positive 6.06% excluding the Financials.  In the third quarter, the 210 reported revenue growth of 9.24% in total and 10.23% excluding the Financials.  

Net Margin Expansion Ending

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 290, net margins have come in at 9.84%, down from 10.03% a year ago, and down from 10.69% in the third quarter.  For the 210, margins are expected to be much lower, but they are lower-margin businesses to begin with.  They are, however, expected to rise to 7.21% from 7.02% last year, and up from the 6.82% in the third quarter. That is entirely due to the remaining Financials. Excluding Financials, net margins of just 6.52% expected, down from 7.18% a year ago and 7.13% in the third quarter.  

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 (all 500), net margins continue to march northward, but we are beginning to see cracks there as well.  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 9.00% in 2011 and 9.24% in 2012.  The pattern is a bit different 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 8.63% in 2011.  However, they are expected to drop to and 8.60% in 2012.

Net Income Still Looks Healthy

Total net income in 2010 rose to $788.8 billion in 2010, up from $538.6 billion in 2009.  The expectations for the full year are very healthy.  In 2011, the total net income for the S&P 500 should be $893.5 billion, or increases of 46.5% and 13.4%, respectively.  The expectation is for 2012 to have total net income come close to $1 trillion mark to $988.0 billion, for growth of 10.1%.  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, 6.00% in 2011.  

Of course, the S&P 500 earns a lot of its income abroad (apx. 40%), 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, it is likely to be a deep and nasty ditch.  The BRIC’s have also all shown signs of slower -- but still robust by developed country standards -- growth.  In their conference call commentary, many companies are blaming the slowdown in earnings growth on Europe, which represents about 15% of S&P 500 earnings.  

The “EPS” for the S&P 500 is expected to be over the $100 “per share” level for the first time at $104.05 in 2012.   That is up from $56.79 for 2009, $83.21 for 2010, and $94.21 for 2011.  In an environment where the 10-year T-note is yielding 1.83%, a P/E of 15.93x based on 2010 and 14.07x based on 2011 earnings looks attractive.  The P/E based on 2012 earnings is just 12.72x.  The P/E’s and T-note rates are as of Thursday (to keep it consistent with the earnings data) but on Friday the stock market was strong and the bond market was weak in response to the employment report.       

Estimate Revisions Activity Rising Fast

Estimate revisions activity is rising fast, and approaching a seasonal peak.   In previous earnings seasons we have generally seen a bounce in the revisions ratio, as the analysts have reacted to better-than-expected earnings and the outlooks on the conference calls.  So far there is no evidence of that happening.  

The revisions ratio for FY1, which is mostly 2011 earnings now stands at 0.57, or almost two cuts for every increase.  The cuts are very widespread, with only three sectors seeing more increases than cuts.  Eight of the sectors, including big ones like Energy, Health Care, Staples and Utilities are seeing more than twice as many cuts as increases.  The picture for FY2  is only slightly better, with a revisions ratio of just 0.64. Only three sectors are seeing more increases than cuts.  The widespread cuts are also confirmed by the ratio of firms with rising mean estimates to falling mean estimates, which now stand at 0.56 and 0.61, respectively.

As the earnings season has progressed, things have been getting a bit better, but only moved the season from being very poor to mediocre.   This is happening when the bar is set at its lowest point in a very long time.  For the remaining firms, that bar is set even lower.  

The market has been off to a very strong start of the year, despite the weak early results.  Valuations are still compelling, if somewhat less so than a few months ago.  However, if the results do not improve, it strikes me as likely that we will at least pause for a while.  The upcoming week will be a busy one, with 69 S&P 500 firms scheduled to report.  

Income Surprises

• So far 290 firms, or 56.0% have reported fourth quarter results.  Total Income Growth at a 5.59%. We have a 1.93 surprise ratio, and 1.92% median surprise -- both weak, but better than last week. Positive Surprises for 59.3% of all firms reporting.
• Positive year-over-year growth for 175, falling EPS for 112 firms, 1.56 ratio, 59.3% of all firms reporting have higher EPS than last year.
• Six sectors have at least half of their results in. Provided remaining firms report in line, 50.2% of total earnings for quarter in.
• Aerospace leads by a wide margin.  Autos and Construction also strong.  Utilities, Materials, Retail and Energy lag.

Historically, a “normal earnings season” will have a surprise ratio of about 3:1 and a median surprise of about 3.0%.  Pay attention to the percent reporting in evaluating the significance of the sector numbers, and probability of a significant change when season is over.

Scorecard & Earnings Surprise 4Q Reported
Income Surprises	Yr/Yr Growth	% Reported	Surprise Median	EPS Surp Pos	EPS Surp Neg	# Grow Pos	# Grow Neg
Aerospace	9.60%	88.89%	14.93	7	0	4	4
Auto	1.41%	71.43%	9.09	3	2	4	1
Construction	46.50%	63.64%	3.57	4	2	5	2
Consumer Discretionary	4.88%	46.67%	3.35	10	3	8	6
Computer and Tech	18.23%	65.75%	3.26	34	12	22	25
Conglomerates	12.31%	87.50%	3.05	6	0	7	0
Consumer Staples	-1.07%	48.65%	2.51	13	2	11	7
Industrial Products	24.95%	68.18%	2.27	9	6	11	4
Medical	3.71%	63.64%	2.22	20	4	19	9
Business Service	17.52%	42.11%	1.07	4	1	8	0
Transportation	17.77%	88.89%	0.80	4	3	7	1
Finance	-4.80%	67.95%	0.53	27	23	27	25
Oils and Energy	7.80%	51.22%	0.00	10	10	14	7
Retail/Wholesale	3.66%	42.55%	0.00	9	6	14	5
Basic Materials	-28.56%	66.67%	0.00	7	7	7	9
Utilities	-11.62%	34.15%	-1.98	5	8	7	7
S&P 500	5.59%	58.00%	1.92	172	89	175	112

Sales Surprises

• Revenue growth of 7.59% among the 290 that have reported, median surprise 0.18 (weak), surprise ratio of 1.16 (very weak).  Positive surprise for 53.8%.  
• Growing Revenues outnumber falling revenues by ratio of 2.45 (normal), 70.0% have higher sales than last year.
• A week start to the season, but somewhat better than it looked last week.
• Energy, Auto and Construction lead, Utilities, Aerospace and Discretionary lag.
• Six sectors reporting more sales disappointments than positive surprises.

Sales Surprises 4Q Reported
Sales Surprises	Yr/Yr Growth	% Reported	Surprise Median	Sales Surp Pos	Sales Surp Neg	# Grow Pos	# Grow Neg
Oils and Energy	18.53%	51.22%	3.816	15	6	19	2
Auto	11.32%	71.43%	3.328	4	1	5	0
Construction	7.14%	63.64%	0.761	4	3	5	2
Retail/Wholesale	9.33%	42.55%	0.689	13	7	19	1
Basic Materials	6.88%	66.67%	0.682	9	7	14	2
Consumer Staples	2.53%	48.65%	0.551	10	8	13	5
Medical	3.30%	63.64%	0.452	16	12	24	4
Business Service	13.99%	42.11%	0.402	6	2	8	0
Computer and Tech	14.17%	65.75%	0.325	28	20	27	20
Finance	-5.28%	67.95%	0.046	27	26	25	28
Industrial Products	15.12%	68.18%	-0.124	7	8	14	1
Conglomerates	-1.72%	87.50%	-0.738	2	5	5	2
Transportation	11.22%	88.89%	-0.749	2	6	8	0
Consumer Discretionary	5.08%	46.67%	-1.338	5	9	10	4
Aerospace	0.83%	88.89%	-1.397	3	5	3	5
Utilities	2.84%	34.15%	-7.895	5	9	7	7
S&P 500	7.59%	58.00%	0.182	156	134	206	83

Reported Quarterly Growth: Total Net Income

• The total net income for the 183 that have reported so far is 7.08% above what was reported in the fourth quarter of 2010, down sharply from 14.82% growth the same 183 firms reported in the third quarter.  Excluding Financials, net income up 11.84%, down from 16.12% growth reported in the third quarter.
• Sequential earnings fall 9.39% for the 70 that have reported, up 2.15% ex-Financials.
• Growth (for the 290 firms) to fall to -2.47% in the first quarter, and -1.13% ex-Financials.
• Total net income reported (183 firms) $168.37 billion vs. $159.46 billion year ago, but down from $181.07 billion in third quarter.  Final growth projected to be just 4.51%, up from 4.45% last week.
• Refer back to % reported in Scorecard to assess probability of significant change in 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
Construction	-44.51%	-15.86%	46.50%	44.42%	32.10%
Industrial Products	-5.12%	-2.80%	24.95%	5.31%	30.45%
Computer and Tech	-25.13%	27.11%	18.23%	5.64%	15.09%
Transportation	-16.99%	3.84%	17.77%	21.33%	13.24%
Business Service	6.98%	-6.25%	17.52%	11.07%	27.55%
Conglomerates	-11.41%	-3.14%	12.31%	4.36%	24.87%
Aerospace	-24.16%	6.54%	9.60%	0.58%	12.50%
Oils and Energy	7.02%	-22.29%	7.80%	-4.89%	63.39%
Consumer Discretionary	-35.38%	-18.11%	4.88%	-8.73%	10.78%
Medical	4.49%	-7.62%	3.71%	-3.04%	6.75%
Retail/Wholesale	12.96%	-2.01%	3.66%	0.56%	7.71%
Auto	30.31%	-35.95%	1.41%	-26.71%	16.16%
Consumer Staples	-14.72%	2.85%	-1.07%	-1.78%	-1.05%
Finance	12.22%	-16.78%	-4.80%	-8.17%	9.18%
Utilities	31.33%	-35.80%	-11.62%	-0.50%	5.76%
Basic Materials	85.64%	-34.37%	-28.56%	-14.75%	25.73%
S&P 500	-2.11%	-7.01%	5.59%	-2.47%	18.25%
Excluding Financial	-4.76%	-4.95%	7.76%	-1.13%	20.37%

Expected Quarterly Growth: Total Net Income

• Total net income (for the 210 yet to report) is expected to be just 1.74% above what was reported in the fourth quarter of 2010, down from 5.90% growth in the third quarter.  Excluding Financials, negative growth of 3.76%, down from 11.31% reported in the second quarter.  
• Relative to the third quarter total net income to rise 4.46%, ex-Financials to fall 5.49%.  
• 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, seven 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	-27.87%	-25.69%	99.48%	252.74%	240.00%
Finance	-29.87%	118.14%	41.90%	-16.97%	-31.88%
Auto	11.34%	-35.93%	36.98%	-6.39%	95.28%
Basic Materials	-5.87%	-15.15%	17.95%	6.19%	62.41%
Oils and Energy	2.98%	-13.67%	15.87%	5.81%	41.50%
Business Services	-16.59%	18.20%	10.60%	18.31%	13.96%
Consumer Discretionary	-0.52%	7.43%	4.82%	9.15%	15.56%
Consumer Staples	-5.54%	-17.65%	3.05%	1.52%	12.10%
Transportation	-4.04%	-6.87%	2.74%	5.08%	11.46%
Aerospace	-17.59%	1.51%	0.06%	10.99%	9.52%
Medical	7.00%	-5.10%	-0.48%	7.45%	8.17%
Retail/Wholesale	-28.25%	39.60%	-1.77%	3.00%	7.82%
Industrial Products	46.76%	-29.14%	-3.45%	12.85%	22.39%
Utilities	47.62%	-58.04%	-12.68%	-13.82%	16.44%
Computer and Tech	14.00%	-7.70%	-16.04%	-10.68%	-8.74%
Conglomerates	- to +	- to -	+ to -	715.28%	-212.31%
S&P 500	-7.45%	4.46%	1.74%	-1.50%	5.90%
Excluding Financial	-2.93%	-5.49%	-3.76%	1.25%	11.31%

Quarterly Growth: Total Revenues Reported

• Revenue growth (for the 290 that have reported) at 7.59%, down from the 12.53% growth posted in the third quarter.  Growth ex-Financials 9.67%, down from 14.77%.
• Slowdown expected to continue in first quarter, with 5.38% growth, 1.68% ex-Financials.
• Sharp slowdown despite improving U.S. economy, may reflect Europe and the dollar.
• Sequentially revenues 0.98% higher than in the third quarter, up 1.51% ex-Financials.
• Aerospace and Utilities the only sectors seeing an acceleration in Revenue growth.
• Seven sectors show lower revenues than in the third quarter.

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
Oils and Energy	-7.85%	-2.01%	18.53%	2.94%	30.91%
Industrial Products	-2.05%	0.12%	15.12%	12.12%	20.38%
Computer and Tech	-13.50%	15.49%	14.17%	24.09%	15.26%
Business Service	-4.37%	3.29%	13.99%	10.54%	18.66%
Auto	-6.53%	3.37%	11.32%	8.48%	17.51%
Transportation	-2.22%	1.33%	11.22%	12.24%	13.40%
Retail/Wholesale	0.45%	0.69%	9.33%	5.56%	10.42%
Construction	-6.66%	-4.48%	7.14%	16.38%	10.19%
Basic Materials	4.25%	-3.59%	6.88%	-1.23%	19.22%
Consumer Discretionary	-7.80%	-1.01%	5.08%	14.85%	10.70%
Medical	-1.82%	1.27%	3.30%	4.27%	7.31%
Utilities	2.27%	-4.78%	2.84%	-0.50%	1.56%
Consumer Staples	-7.27%	-0.10%	2.53%	6.02%	5.34%
Aerospace	-8.86%	6.18%	0.83%	15.62%	-1.11%
Conglomerates	-6.78%	3.36%	-1.72%	4.95%	5.59%
Finance	-2.33%	-2.69%	-5.28%	-6.15%	-1.83%
S&P 500	-4.80%	0.98%	7.59%	5.36%	12.35%
Excluding Financial	-5.14%	1.51%	9.67%	1.68%	14.77%

Quarterly Growth: Total Revenues Expected

• Revenue growth for the 210 yet to report expected to fall to negative 0.94%, from the 9.24% growth posted in the third quarter.  Growth ex-Financials 6.06%, down from 9.24% in 3rd quarter.
• Sequentially revenues down 1.16% from the third quarter, up 3.42% ex-Financials.
• Six sectors expecting revenue growth over 10%, Finance to see a sharp 43.8% year-over-year drop in revenues.
• Year-over-year revenue growth in first quarter expected to be 0.17%, up 5.36% 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
Basic Materials	16.00%	0.45%	16.99%	42.06%	22.72%
Oils and Energy	-0.74%	-13.44%	16.86%	10.89%	42.28%
Construction	7.93%	0.81%	16.60%	33.98%	6.77%
Auto	5.61%	-3.22%	14.53%	12.67%	19.48%
Consumer Discretionary	-5.50%	7.83%	14.50%	10.47%	17.54%
Utilities	-15.45%	3.37%	14.25%	-10.27%	4.16%
Retail/Wholesale	-6.64%	13.58%	5.88%	7.85%	7.00%
Medical	-2.62%	1.75%	5.87%	0.74%	6.30%
Computer and Tech	0.75%	0.01%	4.84%	4.79%	4.80%
Industrial Products	23.99%	-14.61%	4.33%	14.11%	14.45%
Business Services	-3.20%	3.63%	4.01%	7.63%	6.87%
Transportation	3.45%	1.12%	2.65%	14.99%	-3.72%
Aerospace	-5.72%	17.79%	0.69%	10.46%	11.75%
Consumer Staples	-2.45%	-11.06%	-7.30%	1.86%	15.50%
Conglomerates	-34.33%	55.51%	-37.37%	-15.14%	26.88%
Finance	-8.87%	-34.60%	-43.76%	-39.28%	2.54%
S&P 500	2.13%	-1.16%	-0.94%	0.17%	9.24%
Excluding Financial	-3.96%	3.42%	6.06%	5.83%	10.23%

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 290 that have reported fall to 9.84% from 10.03% a year ago, and down from 10.69% in the third quarter.  Net margins ex-Financials fall to 9.46% from 9.63% a year ago and up from 10.11% in the third quarter.
• Final Net Margins will be lower as remaining firms are lower margin businesses, but 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.  A 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
Computer and Tech	18.81%	21.73%	19.74%	20.67%	19.11%	20.98%
Medical	16.11%	15.14%	16.59%	16.49%	17.01%	15.08%
Business Service	14.28%	12.77%	14.07%	12.95%	13.59%	12.39%
Finance	14.43%	12.56%	14.68%	9.48%	14.40%	12.49%
Consumer Staples	10.47%	11.38%	11.06%	10.13%	10.48%	11.80%
Consumer Discretionary	7.16%	10.21%	12.35%	8.66%	8.31%	10.23%
Conglomerates	9.64%	10.14%	10.83%	9.97%	9.04%	8.88%
Transportation	7.48%	8.81%	8.60%	8.52%	6.77%	8.32%
Industrial Products	8.14%	8.40%	8.65%	8.35%	8.48%	7.74%
Utilities	9.22%	7.18%	10.65%	9.53%	9.43%	8.35%
Aerospace	5.81%	6.98%	6.96%	6.82%	6.09%	6.42%
Oils and Energy	7.79%	6.71%	8.46%	8.16%	7.77%	7.37%
Construction	2.56%	4.30%	4.89%	3.88%	1.93%	3.15%
Basic Materials	7.28%	4.09%	6.00%	8.26%	8.79%	6.11%
Auto	5.22%	3.75%	6.05%	7.06%	7.23%	4.11%
Retail/Wholesale	3.31%	2.94%	3.02%	3.02%	3.49%	3.10%
S&P 500	10.12%	9.84%	10.69%	9.98%	10.41%	10.03%
Excluding Financial	9.50%	9.46%	10.11%	10.06%	9.77%	9.63%

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.  Data for the 210 that have not reported.
• Net margins expected to rise to 7.21% from 7.02% a year ago, and up from 6.82% in the third quarter.  Net margins ex-Financials expected to fall to 6.52% from 7.18% a year ago and down from 7.13% in the second quarter.  Is margin expansion coming to an end?  Maybe.
• Seven sectors see year over year margin expansion, nine expected to see contraction.  Three up and 13 down sequentially.
• Margin expansion, is, or at least was, 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
Basic Materials	14.54%	17.92%	21.21%	18.84%	19.45%	17.77%
Aerospace	14.01%	16.03%	18.60%	14.62%	13.94%	16.13%
Finance	11.68%	15.18%	4.55%	8.60%	8.55%	6.02%
Business Service	10.33%	11.99%	10.51%	10.67%	9.40%	11.27%
Oils and Energy	11.26%	10.86%	10.89%	12.36%	11.81%	10.95%
Consumer Staples	10.32%	10.66%	11.52%	11.74%	10.36%	9.59%
Consumer Discretionary	9.63%	9.15%	9.19%	9.80%	9.75%	10.00%
Computer and Tech	9.49%	8.39%	9.09%	9.63%	11.13%	10.47%
Industrial Products	9.00%	7.61%	9.17%	9.37%	9.11%	8.22%
Transportation	5.69%	6.14%	6.66%	6.01%	6.23%	6.13%
Medical	6.59%	6.00%	6.43%	6.35%	6.18%	6.38%
Retail/Wholesale	3.22%	4.18%	3.40%	3.85%	3.37%	4.51%
Utilities	5.82%	3.34%	8.22%	6.11%	6.06%	4.36%
Auto	3.11%	2.95%	4.45%	4.34%	3.74%	2.46%
Construction	1.00%	1.50%	2.03%	2.33%	0.38%	0.87%
Conglomerates	40.59%	-15.99%	-123.73%	24.30%	4.23%	286.18%
S&P 500	6.98%	7.21%	6.82%	7.49%	7.09%	7.02%
Excluding Financial	6.59%	6.52%	7.13%	7.32%	6.89%	7.18%

Annual Total Net Income Growth

• Following rise of just 2.4% in 2009, total earnings for the S&P 500 jumps 46.5% in 2010, 13.3% further expected in 2011.  Growth ex-Financials 28.2% in 2010, 17.2% in 2011.  
• For 2012, 10.6% growth expected. 8.2% ex-Financials.
• Thirteen sectors expected to see total net income rise in 2011 and all but Autos in 2012. Utilities only (small) decliner in 2010.  Eight sectors expected to post double-digit growth in 2011 and nine in 2012.  Energy and Health Care expected to grow less than 5% in 2012. Aerospace and Utilities the only sectors to decline.  Slow growers in 2011 to be high growers in 2012.
• Cyclical/Commodity sectors expected to lead in earnings growth again in 2011.  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 +	-1.29%	41.29%
Finance	- to +	324.64%	-4.81%	23.79%
Transportation	-30.21%	80.26%	-3.00%	18.38%
Conglomerates	-24.01%	11.13%	6.29%	16.46%
Business Service	1.47%	13.57%	17.40%	16.16%
Computer and Tech	-4.57%	47.00%	22.79%	14.99%
Industrial Products	-34.94%	36.40%	37.05%	13.91%
Consumer Discretionary	-15.05%	23.18%	19.19%	12.84%
Retail/Wholesale	2.77%	14.81%	10.73%	11.34%
Basic Materials	-46.07%	56.29%	30.79%	7.94%
Auto	- to +	1448.79%	7.12%	7.47%
Consumer Staples	5.46%	11.65%	8.69%	6.65%
Medical	2.45%	10.33%	8.17%	3.23%
Oils and Energy	-54.89%	50.46%	36.25%	1.29%
Utilities	-14.14%	-0.64%	3.10%	-0.20%
Aerospace	-17.55%	21.78%	11.45%	-2.84%
S&P 500	2.38%	46.52%	13.27%	10.58%

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 7.01% in 2011, 7.75% in 2012.
• Energy, Industrials, Materials and Autos to lead revenue race in 2011.  Three other sectors (all cyclical) also expected to show double-digit revenue growth in 2011. Construction leads by wide margin for 2012, Industrials and Tech also strong.
• All sectors but Staples, Finance and Aerospace expected to show positive top-line growth in 2011.  All sectors 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, 10.36% in 2011, and 8.54% in 2012.

Annual Total Revenue Growth
Sales Growth	2009	2010	2011	2012
Construction	-12.08%	0.47%	4.57%	22.18%
Industrial Products	-17.82%	12.34%	19.66%	16.64%
Computer and Tech	2.14%	15.45%	14.09%	15.49%
Transportation	-13.65%	10.70%	12.72%	15.29%
Basic Materials	-15.26%	10.76%	18.29%	13.18%
Retail/Wholesale	2.66%	4.10%	6.68%	10.97%
Conglomerates	-13.51%	0.94%	3.70%	10.65%
Consumer Discretionary	-15.89%	5.30%	12.47%	10.38%
Auto	-21.47%	9.21%	18.53%	9.77%
Utilities	-6.61%	2.13%	4.91%	7.17%
Aerospace	6.51%	-0.34%	-1.04%	6.97%
Consumer Staples	-2.16%	4.79%	-0.84%	5.83%
Medical	4.45%	11.40%	5.29%	3.78%
Business Service	-3.61%	4.81%	9.26%	1.98%
Finance	-12.25%	0.09%	-13.55%	1.55%
Oils and Energy	-6.93%	23.74%	21.48%	1.20%
S&P 500	-5.53%	7.94%	7.01%	7.75%
Excluding Financial	-10.56%	9.34%	10.36%	8.54%

Annual Net Margins

• Net Margins marching higher, from 5.88% in 2008 to 6.27% in 2009 to 8.51% for 2010, 9.00% expected for 2011.  Trend is expected to continue into 2012 with net margins of 9.24% expected.   A major source of earnings growth.
• Financials significantly distort overall net margins. Net margins ex-Financials 7.78% in 2008, 6.93% in 2009, 8.12% for 2010, 8.63% expected in 2011.  Expected to fall to 8.60% in 2012.  A major crack in margin expansion, earnings growth story.
• Financials net margins soar from -8.42% in 2008 to 14.58% expected for 2012.
• All sectors but Medical and Utilities saw higher net margins in 2010 than in 2009.  Twelve sectors expected to post higher net margins in 2011 than in 2010.  Seven sectors expected to see margin contraction in 2012 and nine to see expansion.
• 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	2010A	2011E	2012E
Computer and Tech	11.75%	14.96%	16.11%	16.04%
Finance	2.56%	10.86%	11.96%	14.58%
Business Service	9.99%	10.82%	11.63%	13.24%
Medical	12.88%	12.75%	13.10%	13.03%
Consumer Staples	9.68%	10.31%	11.30%	11.39%
Conglomerates	8.19%	9.02%	9.24%	9.73%
Consumer Discretionary	7.25%	8.49%	8.99%	9.19%
Industrial Products	6.05%	7.35%	8.42%	8.22%
Transportation	5.70%	9.28%	7.98%	8.20%
Oils and Energy	5.93%	7.22%	8.09%	8.10%
Basic Materials	5.02%	7.08%	7.83%	7.47%
Utilities	8.10%	7.88%	7.74%	7.21%
Aerospace	4.79%	5.86%	6.60%	5.99%
Auto	0.37%	5.24%	4.73%	4.63%
Retail/Wholesale	2.97%	3.27%	3.40%	3.41%
Construction	-0.55%	2.64%	2.49%	2.89%
S&P 500	6.27%	8.51%	9.00%	9.24%
Excluding Financial	6.93%	8.12%	8.63%	8.60%

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

• Revisions ratio for full S&P 500 at 0.57, up from 0.50 last week, still very bearish.  Total revisions activity approaching seasonal peak.
• Conglomerates lead, Construction, Transports only other sectors with positive revisions ratios. Six with two cuts per increase or more.  Utilities, Staples and Autos very weak.
• Ratio of firms with rising to falling mean estimates at 0.56, up from 0.52 still a very bearish reading.
• Total number of revisions (4-week total) past seasonal low at 4,038 up from 3,150 last week (28.2%).  Increases at 1,461 up from 1,049 (39.3%), cuts at 2,577 up from 2,101 (22.7%).

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
Conglomerates	1.28	3	4	25	12	2.08	0.75
Construction	-0.6	4	6	33	27	1.22	0.67
Transportation	-0.12	2	7	52	49	1.06	0.29
Computer and Tech	-0.93	33	32	277	315	0.88	1.03
Retail/Wholesale	-1.81	20	25	167	220	0.76	0.80
Consumer Discretionary	-1.7	11	17	84	120	0.70	0.65
Industrial Products	-2.61	6	15	52	89	0.58	0.40
Basic Materials	-4.34	10	13	73	125	0.58	0.77
Finance	-2.04	27	49	288	495	0.58	0.55
Business Service	-1.03	6	12	29	55	0.53	0.50
Aerospace	-1.82	3	6	29	60	0.48	0.50
Medical	-0.43	17	28	112	256	0.44	0.61
Oils and Energy	-4.76	9	33	128	356	0.36	0.27
Auto	-2.7	4	4	18	51	0.35	1.00
Consumer Staples	-0.52	8	26	44	145	0.30	0.31
Utilities	-1.64	9	31	50	202	0.25	0.29
S&P	-1.73	172	308	1461	2577	0.57	0.56

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

• Revisions ratio for full S&P 500 at 0.64, up from 0.61 last week, in bearish territory.
• The low Revisions and Firm Up/Down Ratios are a troubling sign for the market, especially now that total activity is high.
• Only three sectors, Transports, Construction and Conglomerates, have a positive revisions ratios (above 1.0).  Five sectors with two or more cuts per increase.  Utilities, Autos and Staples very weak.
• Ratio of firms with rising estimate to falling mean estimates at 0.61, up from 0.59 last weeks.  In bearish territory.
• Total number of revisions (4-week total) at 2,410, up from 2,069 (16.5%), a few weeks from peak.  Increases at 944 up from 784 last week (20.4%), cuts at 1,466 up from 1,285 last week (14.1%).

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	0.21	4	5	27	14	1.93	0.80
Construction	0.37	5	6	19	12	1.58	0.83
Conglomerates	0.14	4	3	15	11	1.36	1.33
Computer and Tech	-1.30	25	37	179	191	0.94	0.68
Business Service	-0.83	9	9	23	26	0.88	1.00
Basic Materials	-2.19	9	13	57	67	0.85	0.69
Retail/Wholesale	-1.81	20	27	102	123	0.83	0.74
Aerospace	-1.20	3	6	20	27	0.74	0.50
Consumer Discretionary	-1.16	10	17	65	89	0.73	0.59
Industrial Products	-0.75	11	11	34	54	0.63	1.00
Finance	-1.44	30	46	163	269	0.61	0.65
Medical	-0.64	11	34	89	190	0.47	0.32
Oils and Energy	-2.75	14	27	84	188	0.45	0.52
Consumer Staples	-0.18	12	23	28	78	0.36	0.52
Auto	-2.21	3	5	8	25	0.32	0.60
Utilities	-3.03	10	28	31	102	0.30	0.36
S&P 500	-1.40	180	297	944	1466	0.64	0.61

Total Income and Share

• S&P 500 earned $538.6 billion in 2009, rising to earn $788.8 billion in 2010, $893.5 billion expected in 2011.
• The S&P 500 total earnings expectations dip below the $1 trillion mark in 2012 at $988.0 billion. Finance share of total earnings moves from 5.9% in 2009 to 17.9% in 2010, dip to 15.1% expected for 2011; rebound to 16.9% in 2012, but still well below 2007 peak of over 30%.  Energy share also rising going from 11.9% in 2009 to 14.7% in 2011, dip to 13.5% 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	$134,987	$165,752	$190,603	17.11%	18.55%	19.29%	18.92%
Finance	$141,273	$134,482	$166,478	17.91%	15.05%	16.85%	14.45%
Oils and Energy	$96,418	$131,368	$133,058	12.22%	14.70%	13.47%	11.32%
Medical	$99,136	$107,240	$110,699	12.57%	12.00%	11.20%	10.54%
Consumer Staples	$62,382	$67,803	$72,313	7.91%	7.59%	7.32%	8.68%
Retail/Wholesale	$57,851	$64,059	$71,323	7.33%	7.17%	7.22%	9.11%
Utilities	$48,065	$49,553	$49,454	6.09%	5.55%	5.01%	5.96%
Conglomerates	$27,645	$29,385	$34,223	3.50%	3.29%	3.46%	3.59%
Basic Materials	$24,115	$31,541	$34,044	3.06%	3.53%	3.45%	3.44%
Consumer Discretionary	$25,111	$29,929	$33,772	3.18%	3.35%	3.42%	3.92%
Industrial Products	$16,588	$22,733	$25,895	2.10%	2.54%	2.62%	2.69%
Business Service	$14,161	$16,625	$19,312	1.80%	1.86%	1.95%	2.46%
Transportation	$14,259	$13,832	$16,374	1.81%	1.55%	1.66%	1.88%
Aerospace	$13,543	$15,093	$14,664	1.72%	1.69%	1.48%	1.39%
Auto	$11,394	$12,205	$13,116	1.44%	1.37%	1.33%	1.10%
Construction	$1,911	$1,887	$2,666	0.24%	0.21%	0.27%	0.55%
S&P 500	$788,840	$893,487	$987,995	100.00%	100.00%	100.00%	100.00%

P/E Ratios

• Trading at 15.93x 2010, 14.07x 2011 earnings, or earnings yields of 6.27% and 7.11%, respectively.  P/E for 2012 at 12.72x or earnings yield of 7.86%.  Very Preliminary 2013 P/E of 11.40, or earnings yield of 8.77%.
• Earnings Yields still attractive relative to 10-year T-Note rate of 1.83% and 30-year bond rate of 3.01%. (P/E’s and rates as of Thursday close).
• No single-digit P/E sectors for either year; Autos, Oil and Finance Cheapest for 2012.
• Construction has highest P/E for all three years by wide margin.
• S&P 500 earned $56.79 in 2009 rising to $83.21 in 2010.  Currently expected to earn $94.21 in 2011 and $104.05 for 2012.  Preliminary 2013 estimate $116.28.

P/E Ratios
P/E	2009	2010	2011	2012
Auto	187.47	12.10	11.30	10.51
Oils and Energy	22.20	14.76	10.83	10.69
Finance	54.57	12.85	13.50	10.91
Aerospace	15.74	12.93	11.60	11.94
Medical	14.74	13.36	12.35	11.96
Computer and Tech	25.90	17.62	14.35	12.48
Basic Materials	28.02	17.93	13.71	12.70
Industrial Products	27.80	20.38	14.87	13.05
Conglomerates	18.13	16.31	15.35	13.18
Transportation	29.88	16.58	17.09	14.43
Consumer Discretionary	24.15	19.60	16.45	14.57
Consumer Staples	19.53	17.50	16.10	15.09
Utilities	15.49	15.59	15.12	15.15
Business Service	24.79	21.83	18.60	16.01
Retail/Wholesale	22.72	19.79	17.87	16.05
Construction	-176.08	36.16	36.63	25.92
S&P 500	23.34	15.93	14.07	12.72

Data in this report, unless stated otherwise, is through the close on Thursday 2/2/2012.

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.
 
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