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Key Points:

• Still early, but the Fourth Quarter earnings season is off to a shaky start. Total reported earnings growth is a negative 3.79% for the 70 firms of the S&P 500 (14.0%) that have reported so far, but those represent 22.7% of total expected earnings. Ex-Financials growth is negative 0.90% year over year. Total revenue growth 1.98%, 7.42% ex-Financials. Median earnings surprise 1.80% and median sales surprise 0.21%.
• Sharp slowdown from the 10.0% earnings, and 5.36% revenue growth those same 70 firms reported in the third quarter.
• For remaining 430 firms, year-over-year growth expected to slow to 3.87% in fourth quarter, 2.00% excluding Financials. Down 5.52% sequentially, 9.53% decline expected ex-Financials.  Dramatic slowdown, but easy hurdle to clear. Revenue growth expected to slow to 4.65%, 8.20% ex-Financials. Sequentially Revenue to rise 0.15% and rise 2.22% ex-Financials. Net margin to fall to 8.12% from 9.18% a year ago.
• Full-year total earnings for the S&P 500 jumps 46.5% in 2010, expected to rise 13.2% further in 2011. Growth to continue in 2012 with total net income expected to rise 10.1%. Financials major earnings driver in 2010. Excluding Financials, growth was 28.2% in 2010, and expected to be 17.2% in 2011 and 7.4% in 2012.
•  Total revenues for the S&P 500 rise 7.94% in 2010, expected to be up 6.32% in 2011, and 7.23% in 2012. Excluding Financials, revenues up 9.34% in 2010, expected to rise 9.71% in 2011 and 7.81% in 2012.
• Annual Net Margins marching higher, from 5.88% in 2008 to 6.27% in 2009 to 8.51% for 2010, 9.06% expected for 2011 and 9.31% 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, 8.68% expected in 2011, but fall to 8.65% in 2012.
• Revisions ratio for full S&P 500 at 0.49 for 2011 (very bearish), and 0.59 for 2012 (bearish). Ratio of firms with rising to falling mean estimates at 0.57 for 2011 (bearish), 0.60 (bearish) for 2012. Total revisions activity past seasonal low and rising fast.
• S&P 500 earned $538.6 billion in 2009, rising to $789.0 billion in 2010, expected to climb to $893.3 billion in 2011. In 2012 the 500 are collectively expected to earn $983.8 billion.
• S&P 500 earned $56.81 in 2009: $83.20 in 2010 and $94.30 in 2011 expected bottom-up. For 2012, $103.75 expected. Puts P/Es at 15.80 for 2010, and 13.95x for 2011 and 12.67x 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, unfortunately we may not be able to say the same about the fourth quarter. While it is still too early to draw any firm conclusions -- only 70 firms of the S&P 500 (14.0%) have reported -- the median surprise is 1.80% and the surprise ratio is just 1.86. However, assuming that all the remaining firms report exactly in line with expectations, then 22.7% of all earnings are in. 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 towards those weaker 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 70 that have reported is actually 3.79% below what those same 70 firms earned a year ago, and is 9.39% below what they earned in the third quarter. They reported year-over-year growth of 10.02% in the third quarter. The picture is just a little bit better if we take the Financials out of the picture. In the early going, they are a big part of the picture, representing 31.4% of the firms and 37.3% of the total earnings reported.  Without them, the year-over-year decline in net income is just 0.90% and earnings are up sequentially by 2.15%.

The bar is also set low for the remaining 430 firms, but still better than the results we have seen so far. They are expected to see year-over-year growth of just 3.87%, or 2.00% if we exclude the Financial sector. That is far below the 16.89% total and 19.60% ex-Financial growth those 430 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 Better

Revenue growth has held up better, with the 70 reporting 1.98% growth. Most of the revenue weakness, though, has come from the Financials. If we exclude the Financials that have reported, revenue is up 7.42% year over year. The 430 are expected to see revenue growth to slow to 4.65% in total, and 8.20% excluding the Financials. In the third quarter, the 430 reported revenue growth of 12.53% in total and 13.41% 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 70, net margins have come in at 12.05%, down from 12.78% a year ago, and 13.13% in the third quarter.  

For the 430, margins are expected to be much lower, but they are lower-margin businesses to begin with. They, however, are also expected to fall, dropping to 8.12% from 8.18% last year, and well below the 8.61% in the third quarter. Excluding Financials, the picture is even worse, with net margins of just 7.77% expected, down from 8.24% a year ago and 8.78% 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, 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 9.06% in 2011 and 9.31% 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 8.68% in 2011. However, they are expected to drop to 8.65% in 2012.

Net Income Expectations Healthy

Total net income in 2010 rose to $789.0 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 $893.3 billion, or increases of 46.5% and 13.2%, respectively. The expectation is for 2012 to have total net income come close to $1 trillion mark to $983.8 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, 5.99% 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, it is likely to be a deep and nasty crevasse. The BRICs have also all shown signs of slowing -- 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.

Breaking Down the S&P 500 “EPS”

The “EPS” for the S&P 500 is expected to be over the $100 “per share” level for the first time at $103.75 in 2012. That is up from $56.81 for 2009, $83.20 for 2010, and $94.23 for 2011. In an environment where the 10-year T-note is yielding 2.03%, a P/E of 15.8x based on 2010 and 14.0x based on 2011 earnings looks attractive. The P/E based on 2012 earnings is just 12.7x.

Estimate Revisions to Pick Up

Estimate revisions activity is past its seasonal low, and should at least triple from here by early to mid-February. 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 0.49, or more than two cuts for every increase. The cuts are very widespread, with only a single sector – Transports -- seeing more increases than cuts. Eight of the sectors, including big ones like Energy and Tech, are seeing more than twice as many cuts as increases.

The picture for FY2, or mostly 2012 is only slightly better, with a revisions ratio of just 0.59. Only three sectors -- Transports, Industrials and Construction -- 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 0.57 and 0.60, respectively.

Relative to recent quarters, we are off to an exceptionally weak start, but we are still seeing more positive than negative surprises. This is happening when the bar is set at its lowest point in a very long time. For the remaining firms, the bar is also set low, however given the results so far, that really does not provide any assurance that they will be able to clear it.  

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 117 S&P 500 firms scheduled to report. Thus by next week, we will be almost at the halfway point, and will be in a better position to “call the election.”

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
Medical	8.77%	6.82%	12.28	3	0	2	1
Transportation	21.38%	33.33%	9.94	3	0	2	1
Basic Materials	-36.34%	20.83%	4.69	4	1	2	3
Utilities	8.96%	2.44%	4.23	1	0	1	0
Consumer Discretionary	-9.75%	10.00%	3.09	2	0	1	2
Computer and Tech	0.12%	17.81%	2.56	8	4	7	6
Business Service	16.89%	10.53%	2.38	2	0	2	0
Aerospace	-13.91%	11.11%	1.18	1	0	0	1
Finance	-8.29%	28.21%	0.69	11	9	11	11
Retail/Wholesale	5.81%	23.40%	0.00	2	4	7	3
Consumer Staples	-4.85%	8.11%	0.00	1	1	0	3
Auto	9.33%	14.29%	-3.23	0	1	1	0
Construction	-6.25%	9.09%	-5.88	0	1	0	1
Conglomerates	na	na	Na	na	Na	na	na
Oils and Energy	na	na	Na	na	Na	na	na
S&P 500	-3.79%	14.00%	1.80	39	21	37	32

Sales Surprises

• Revenue growth of 3.87% among the 70 that have reported, median surprise 0.21 (weak), surprise ratio of 1.19 (very weak). Positive surprise for 54.3%.
• Growing Revenues outnumber falling revenues by ratio of 2.04 (normal to slightly weak), 67.1% 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	-0.09%	20.83%	3.224	4	1	4	1
Medical	8.13%	6.82%	2.763	3	0	3	0
Consumer Discretionary	9.74%	10.00%	1.704	2	1	2	1
Industrial Products	8.75%	4.55%	1.62	1	0	1	0
Business Service	16.38%	10.53%	1.053	1	1	2	0
Aerospace	-1.44%	11.11%	0.78	1	0	0	1
Consumer Staples	6.53%	8.11%	0.665	2	1	2	1
Retail/Wholesale	6.69%	23.40%	-0.094	5	6	10	1
Transportation	15.45%	33.33%	-0.137	1	2	3	0
Computer and Tech	7.31%	17.81%	-0.345	6	7	9	4
Finance	-6.99%	28.21%	-0.618	11	11	9	13
Auto	9.23%	14.29%	-0.944	0	1	1	0
Utilities	-5.51%	2.44%	-17.027	0	1	0	1
Conglomerates	Na	na	Na	na	Na	na	na
Oils and Energy	Na	na	Na	na	Na	na	na
S&P 500	1.98%	14.00%	0.211	38	32	47	23

Reported Quarterly Growth: Total Net Income

• The total net income for the 30 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 9.39% for the 70 that have reported, up 2.15% ex-Financials.
• Growth (for the 70 firms) fall to -6.93% in the first quarter, and -1.89% ex-Financials.
• Total net income reported (70 firms) $51.22 Billion, vs. $53.24 billion a year ago, and down from $56.53 billion in the third quarter. Final growth projected to be just 2.0%.
• 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
Industrial Products	-9.54%	7.25%	32.14%	13.45%	13.11%
Transportation	-12.57%	2.48%	21.38%	45.91%	10.13%
Business Service	-12.81%	2.76%	16.89%	7.55%	31.89%
Auto	-12.05%	-20.23%	9.33%	-5.85%	25.67%
Utilities	38.43%	-44.13%	8.96%	4.90%	5.38%
Medical	-6.47%	2.68%	8.77%	-10.95%	-0.42%
Retail/Wholesale	35.99%	-5.14%	5.81%	3.27%	8.24%
Computer and Tech	-21.14%	13.66%	0.12%	1.55%	9.33%
Consumer Staples	-15.86%	12.43%	-4.85%	2.16%	3.92%
Construction	63.22%	42.86%	-6.25%	200.30%	-30.00%
Finance	17.58%	-23.87%	-8.29%	-12.67%	11.82%
Consumer Discretionary	-27.45%	-60.15%	-9.75%	-22.05%	2.49%
Aerospace	18.44%	-17.72%	-13.91%	2.65%	5.33%
Basic Materials	63.09%	-19.60%	-36.34%	-29.47%	8.57%
Conglomerates	na	Na	Na	Na	Na
Oils and Energy	na	Na	Na	Na	Na
S&P 500	-0.01%	-9.39%	-3.79%	-6.93%	10.02%
Excluding Financial	-10.47%	2.15%	-0.90%	-1.89%	8.63%

Expected Quarterly Growth: Total Net Income

• Total net income (for the 430 yet to report) is expected to be just 3.87% above what was reported in the fourth quarter of 2010, down from 16.89% growth in the third quarter. Excluding Financials, growth of 2.00%, down from 19.60% reported in the second quarter.
• Relative to the third quarter total net income to fall 5.52%, ex-Financials to fall 9.53%.
• Financials the only sector to see growth accelerate from the third quarter. Six sectors expected to see negative year-over-year growth.
• Ten sectors expected to earn less in fourth quarter than in the third, nine 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	-29.55%	-30.76%	42.90%	63.65%	67.32%
Finance	-13.58%	55.47%	23.98%	-0.58%	-16.60%
Transportation	-13.88%	2.76%	13.34%	13.71%	15.24%
Oils and Energy	5.90%	-18.71%	12.27%	-1.01%	60.06%
Business Services	-4.62%	6.76%	12.25%	16.53%	17.90%
Auto	33.20%	-35.03%	9.97%	-24.33%	22.29%
Industrial Products	22.98%	-19.15%	6.05%	11.49%	27.75%
Consumer Discretionary	-10.89%	11.79%	5.73%	7.82%	17.12%
Computer and Tech	-6.15%	7.39%	3.84%	-0.67%	9.65%
Basic Materials	45.82%	-25.53%	1.79%	4.23%	45.20%
Medical	8.63%	-10.11%	0.25%	-0.67%	7.44%
Consumer Staples	-5.01%	-12.25%	-1.10%	2.36%	6.37%
Retail/Wholesale	-21.99%	28.73%	-2.71%	3.55%	7.68%
Aerospace	-6.43%	-10.59%	-8.16%	5.02%	12.75%
Utilities	34.23%	-41.81%	-9.50%	-2.82%	9.40%
Conglomerates	-2.59%	-3.60%	-12.04%	10.12%	16.20%
S&P 500	0.28%	-5.52%	3.87%	1.13%	16.49%
Excluding Financial	1.84%	-9.53%	2.00%	1.30%	19.60%

Quarterly Growth: Total Revenues Reported

• Revenue growth (for the 70 that have reported) at 1.98%, down from the 5.36% growth posted in the third quarter.  Growth ex-Financials 7.42%, down from 11.45%.
• Sharp slowdown despite improving U.S. economy, may reflect Europe and the dollar.
• Sequentially revenues 1.28% lower than in the third quarter, down 0.35% ex-Financials.
• Two sectors yet to report, five 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	-11.56%	5.14%	16.38%	15.77%	21.82%
Transportation	-1.31%	-0.64%	15.45%	14.78%	16.86%
Construction	-26.02%	16.22%	10.81%	70.79%	-0.61%
Consumer Discretionary	-2.36%	-13.50%	9.74%	11.09%	12.90%
Auto	5.64%	-3.44%	9.23%	2.69%	19.34%
Industrial Products	-1.08%	0.20%	8.75%	8.64%	10.06%
Medical	2.96%	2.70%	8.13%	2.46%	7.16%
Computer and Tech	-11.96%	9.05%	7.31%	15.75%	12.70%
Retail/Wholesale	9.78%	-7.92%	6.69%	-4.28%	8.99%
Consumer Staples	-6.66%	14.70%	6.53%	16.14%	5.49%
Basic Materials	7.48%	-8.04%	-0.09%	-11.24%	15.26%
Aerospace	9.05%	-15.59%	-1.44%	-10.55%	1.09%
Utilities	17.22%	-18.24%	-5.51%	-11.41%	-2.10%
Finance	-0.36%	-3.00%	-6.99%	-9.28%	-4.35%
Conglomerates	na	na	na	Na	Na
Oils and Energy	na	na	na	Na	Na
S&P 500	-0.76%	-1.28%	1.98%	-0.27%	5.36%
Excluding Financial	-0.98%	-0.35%	7.42%	4.18%	11.45%

Quarterly Growth: Total Revenues Expected

• Revenue growth for the 430 yet to report expected to fall to 4.65%, from the 12.53% growth posted in the third quarter. Growth ex-Financials 8.20%, down from 13.41% in 3rd quarter.
• Sequentially, revenues 0.15% higher than in the third quarter, up 2.22% ex-Financials.
• Four sectors expecting revenue growth over 10%, Finance to see sharp 30.6% year-over-year drop in revenues.
• Year-over-year revenue growth in first quarter expected to be 4.65%, up 8.20% 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	-19.36%	-2.74%	18.98%	-15.92%	32.05%
Construction	8.96%	-2.95%	11.43%	28.61%	8.88%
Consumer Discretionary	8.10%	7.67%	11.30%	26.73%	15.05%
Basic Materials	10.98%	-1.60%	10.28%	15.83%	20.66%
Industrial Products	14.37%	-6.45%	9.82%	18.34%	18.49%
Transportation	1.38%	4.44%	9.23%	13.50%	9.55%
Utilities	-7.62%	0.16%	9.06%	-4.12%	2.73%
Computer and Tech	-2.10%	6.38%	8.60%	10.68%	10.80%
Retail/Wholesale	-6.73%	11.74%	6.99%	7.04%	8.17%
Auto	6.19%	-2.55%	5.89%	9.39%	17.55%
Business Services	-1.35%	2.93%	5.63%	8.08%	8.90%
Medical	-0.94%	1.32%	3.55%	3.39%	7.00%
Aerospace	-5.50%	8.21%	2.26%	11.36%	-1.08%
Conglomerates	-3.02%	6.90%	1.24%	5.20%	5.64%
Consumer Staples	-1.17%	-8.56%	-4.81%	2.06%	11.25%
Finance	21.70%	-23.82%	-30.61%	-4.80%	3.30%
S&P 500	1.69%	0.15%	4.65%	2.12%	12.53%
Excluding Financial	-5.16%	2.22%	8.20%	2.74%	13.41%

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 70 that have reported fall to 12.05% from 12.78% a year ago, and down from 13.13% in the third quarter. Net margins ex-Financials fall to 11.52% from 12.49% a year ago but up from 11.24% 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. 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	20.57%	22.96%	22.03%	23.09%	20.64%	24.61%
Finance	15.42%	13.07%	16.65%	10.14%	15.96%	13.25%
Aerospace	12.91%	11.88%	12.19%	13.19%	12.26%	13.60%
Business Service	9.48%	9.61%	9.84%	9.67%	9.02%	9.57%
Consumer Staples	8.31%	9.22%	9.41%	8.37%	8.82%	10.32%
Basic Materials	12.37%	8.15%	9.33%	15.13%	16.73%	12.80%
Consumer Discretionary	5.97%	8.03%	17.44%	9.45%	8.31%	9.77%
Transportation	6.83%	7.71%	7.48%	7.45%	5.30%	7.33%
Utilities	8.72%	7.38%	10.80%	5.55%	8.63%	6.40%
Industrial Products	6.64%	7.26%	6.78%	7.02%	6.29%	5.98%
Medical	5.55%	6.11%	6.11%	6.27%	6.57%	6.07%
Auto	3.28%	3.94%	4.76%	3.71%	3.78%	3.93%
Retail/Wholesale	4.25%	3.43%	3.33%	3.41%	4.32%	3.46%
Construction	1.57%	3.15%	2.56%	1.83%	-1.97%	3.72%
Conglomerates	na	Na	na	Na	na	Na
Oils and Energy	na	Na	na	Na	na	Na
S&P 500	12.15%	12.05%	13.13%	11.25%	12.91%	12.78%
Excluding Financial	10.42%	11.52%	11.24%	11.84%	11.06%	12.49%

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 430 that have not reported.
• Net margins expected to fall to 8.12% from 8.18% a year ago, and down from 8.61% in the third quarter. Net margins ex-Financials expected to fall to 7.77% from 8.24% a year ago and down from 8.78% in the second quarter. Is margin expansion coming to an end? Maybe.
• Five sectors see year-over-year margin expansion, eleven expected to see contraction. Five up and eleven 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
Finance	9.63%	13.56%	6.64%	8.36%	9.22%	7.59%
Computer and Tech	12.71%	13.26%	13.13%	13.76%	14.16%	13.87%
Medical	14.37%	13.10%	14.77%	14.64%	14.95%	13.53%
Business Service	12.56%	13.00%	12.53%	12.13%	11.65%	12.23%
Consumer Staples	10.53%	10.95%	11.41%	11.20%	10.49%	10.54%
Consumer Discretionary	7.94%	9.63%	9.27%	9.34%	9.33%	10.13%
Conglomerates	9.44%	9.40%	10.43%	10.10%	9.02%	10.82%
Transportation	7.84%	9.23%	9.38%	9.20%	7.82%	8.89%
Industrial Products	8.22%	7.65%	8.85%	8.71%	8.73%	7.92%
Oils and Energy	9.57%	7.29%	8.72%	8.57%	8.13%	7.72%
Aerospace	5.66%	5.71%	6.92%	6.74%	6.00%	6.36%
Utilities	8.12%	5.59%	9.61%	8.20%	8.01%	6.73%
Basic Materials	6.92%	5.27%	6.96%	7.59%	7.69%	5.71%
Auto	5.00%	3.98%	5.97%	7.16%	7.22%	3.83%
Retail/Wholesale	3.12%	3.73%	3.24%	3.56%	3.22%	4.10%
Construction	1.62%	2.50%	3.51%	3.16%	1.27%	1.95%
S&P 500	8.44%	8.12%	8.61%	8.71%	8.52%	8.18%
Excluding Financial	8.34%	7.77%	8.78%	8.74%	8.46%	8.24%

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, 13.2% further expected in 2011. Growth ex-Financials 28.2% in 2010, 17.2% in 2011.
• For 2012, 10.14% growth expected; 7.38% ex-Financials.
• Thirteen sectors expected to see total net income rise in 2011 and all but Autos in 2012. Utilities the 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 +	-11.50%	57.47%
Finance	- to +	324.69%	-5.09%	25.77%
Transportation	-30.21%	80.16%	-3.31%	17.97%
Industrial Products	-34.94%	36.40%	32.42%	17.70%
Business Service	1.47%	13.59%	17.29%	13.99%
Conglomerates	-24.01%	11.13%	9.27%	13.57%
Consumer Discretionary	-15.02%	23.19%	19.55%	12.89%
Retail/Wholesale	2.76%	14.81%	10.44%	11.91%
Computer and Tech	-4.58%	47.00%	22.54%	8.24%
Consumer Staples	5.46%	11.65%	8.58%	7.72%
Basic Materials	-45.93%	55.63%	32.68%	7.70%
Aerospace	-17.55%	21.78%	6.39%	5.07%
Medical	2.45%	10.33%	7.85%	3.35%
Oils and Energy	-54.89%	50.46%	36.55%	3.08%
Utilities	-14.14%	-0.64%	2.62%	2.14%
Auto	- to +	1448.79%	17.41%	-0.16%
S&P 500	2.37%	46.51%	13.21%	10.14%

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 6.32% in 2011, 7.23% 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. 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, 9.71% in 2011, and 7.81% in 2012.

Annual Total Revenue Growth
Sales Growth	2009	2010	2011	2012
Construction	-12.08%	0.47%	4.31%	22.21%
Industrial Products	-17.82%	12.34%	19.10%	16.76%
Transportation	-13.65%	10.70%	12.95%	15.56%
Auto	-21.47%	9.21%	14.49%	14.92%
Computer and Tech	2.14%	15.45%	14.09%	13.74%
Basic Materials	-15.26%	10.76%	18.26%	12.71%
Consumer Discretionary	-15.89%	5.30%	12.45%	10.77%
Conglomerates	-13.51%	0.94%	4.52%	9.90%
Retail/Wholesale	2.66%	4.10%	6.71%	8.58%
Aerospace	6.51%	-0.34%	-0.65%	8.55%
Consumer Staples	-2.16%	4.79%	-2.05%	7.70%
Utilities	-6.61%	2.13%	5.25%	6.93%
Medical	4.45%	11.40%	5.13%	4.37%
Finance	-12.25%	0.09%	-14.43%	2.73%
Business Service	-3.61%	4.81%	9.14%	2.18%
Oils and Energy	-6.93%	23.74%	18.52%	-0.87%
S&P 500	-5.53%	7.94%	6.32%	7.23%
Excluding Financial	-10.56%	9.34%	9.71%	7.81%

Annual Net Margins

• Net Margins marching higher, from 5.88% in 2008 to 6.27% in 2009 to 8.51% for 2010, 9.06% expected for 2011. Trend expected to continue into 2012 with net margins of 9.31% expected. 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, 8.68% expected in 2011. Expected to fall to 8.65% in 2012. A major crack in margin expansion, earnings growth story.
• Financials net margins soar from -8.42% in 2008 to 14.75% 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. Six sectors expected to see margin contraction in 2012, on flat 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	2010E	2011E	2012E
Computer and Tech	11.76%	14.97%	16.08%	15.30%
Finance	2.56%	10.86%	12.05%	14.75%
Business Service	9.97%	10.81%	11.62%	12.96%
Medical	12.88%	12.75%	13.08%	12.96%
Consumer Staples	9.68%	10.31%	11.43%	11.43%
Conglomerates	8.19%	9.02%	9.43%	9.74%
Consumer Discretionary	7.26%	8.49%	9.03%	9.20%
Oils and Energy	5.93%	7.22%	8.31%	8.64%
Industrial Products	6.05%	7.35%	8.17%	8.24%
Transportation	5.70%	9.28%	7.95%	8.11%
Basic Materials	5.05%	7.09%	7.96%	7.60%
Utilities	8.10%	7.88%	7.68%	7.34%
Aerospace	4.79%	5.86%	6.27%	6.07%
Auto	0.37%	5.24%	5.37%	4.66%
Retail/Wholesale	2.97%	3.28%	3.39%	3.50%
Construction	-0.55%	2.64%	2.24%	2.89%
S&P 500	6.27%	8.51%	9.06%	9.31%
Excluding Financial	6.93%	8.12%	8.68%	8.65%

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

• Revisions ratio for full S&P 500 at 0.49, down from 0.52 last week, very bearish. Total revisions activity past seasonal low. Still thin samples in many sectors.
• Transports the on sector with revisions ratio above 1.0. Eight with two cuts per increase or more. Transports and Construction lead, Utilities, Staples and Autos very weak.
• Ratio of firms with rising to falling mean estimates at 0.57, up from 0.53 -- still a very bearish reading.
• Total number of revisions (4 week total) past seasonal low at 1,888 up from 1,888 last week (13.5%).  Increases at 701 up from 649 (8.0%), cuts at 1,442 up from1,239 (16.4%).

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	0.28	6	3	33	14	2.36	2.00
Construction	-0.25	4	4	9	10	0.90	1.00
Conglomerates	0.14	4	3	4	5	0.80	1.33
Aerospace	-0.13	1	7	9	13	0.69	0.14
Business Service	-0.69	5	11	20	29	0.69	0.45
Retail/Wholesale	-2.05	17	29	115	170	0.68	0.59
Finance	-0.87	23	51	156	294	0.53	0.45
Consumer Discretionary	-1.02	11	15	35	66	0.53	0.73
Oils and Energy	-2.9	17	24	125	266	0.47	0.71
Computer and Tech	-1.07	22	34	60	145	0.41	0.65
Medical	-0.47	17	27	53	136	0.39	0.63
Industrial Products	-0.97	7	9	15	41	0.37	0.78
Basic Materials	-2.46	7	13	22	64	0.34	0.54
Auto	-1.47	2	5	5	16	0.31	0.40
Consumer Staples	-0.39	10	21	19	63	0.30	0.48
Utilities	-0.87	9	28	21	110	0.19	0.32
S&P 500	-1.11	162	284	701	1442	0.49	0.57

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

• Revisions ratio for full S&P 500 at 0.59, down from 0.60 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, will be more so if it stays low as activity picks up.
• Only three sectors, Transports, Industrials and Construction, have a positive revisions ratios (above 1.0).  Five sectors with two or more cuts per increase. Autos and Utilities very weak, but on small samples.
• Ratio of firms with rising estimate to falling mean estimates at 0.60, down from 0.64 last weeks.  In bearish territory.
• Total number of revisions (4-week total) at 1,454, up from 1.227 (18.5%), past the low for the season. Still 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	0.10	5	4	14	11	1.27	1.25
Industrial Products	0.13	9	7	24	19	1.26	1.29
Construction	7.66	5	2	5	4	1.25	2.50
Business Service	-0.09	8	8	18	20	0.90	1.00
Retail/Wholesale	-1.00	20	26	119	168	0.71	0.77
Consumer Discretionary	-1.42	11	14	29	42	0.69	0.79
Conglomerates	0.06	4	3	2	3	0.67	1.33
Finance	-0.79	29	44	96	159	0.60	0.66
Basic Materials	-1.70	8	11	25	45	0.56	0.73
Computer and Tech	-0.63	17	39	54	101	0.53	0.44
Oils and Energy	-2.90	11	29	76	144	0.53	0.38
Consumer Staples	-0.18	11	20	16	32	0.50	0.55
Medical	-0.49	15	29	41	95	0.43	0.52
Aerospace	-0.19	2	5	5	12	0.42	0.40
Utilities	-1.13	8	29	11	51	0.22	0.28
Auto	-0.62	3	5	2	11	0.18	0.60
S&P 500	-0.70	166	275	537	917	0.59	0.60

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 $983.8 billion.
• Finance share of total earnings moves from 5.9% in 2009 to 17.9% in 2010, dip to 15.0% expected for 2011; rebound to 17.1% 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 13.8% 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	$165,449	$179,090	17.11%	18.52%	18.20%	18.58%
Finance	$141,297	$134,111	$168,666	17.91%	15.01%	17.14%	14.29%
Oils and Energy	$96,418	$131,655	$135,717	12.22%	14.74%	13.79%	11.48%
Medical	$99,136	$106,916	$110,494	12.56%	11.97%	11.23%	10.62%
Consumer Staples	$62,388	$67,740	$72,971	7.91%	7.58%	7.42%	8.80%
Retail/Wholesale	$57,918	$63,964	$71,579	7.34%	7.16%	7.28%	9.18%
Utilities	$48,065	$49,323	$50,378	6.09%	5.52%	5.12%	6.06%
Basic Materials	$24,156	$32,049	$34,517	3.06%	3.59%	3.51%	3.42%
Conglomerates	$27,645	$30,208	$34,308	3.50%	3.38%	3.49%	3.60%
Consumer Discretionary	$25,132	$30,046	$33,920	3.19%	3.36%	3.45%	3.90%
Industrial Products	$16,588	$21,966	$25,854	2.10%	2.46%	2.63%	2.67%
Business Service	$14,144	$16,589	$18,910	1.79%	1.86%	1.92%	2.41%
Transportation	$14,269	$13,797	$16,276	1.81%	1.54%	1.65%	1.91%
Aerospace	$13,543	$14,409	$15,140	1.72%	1.61%	1.54%	1.43%
Auto	$11,394	$13,377	$13,356	1.44%	1.50%	1.36%	1.10%
Construction	$1,911	$1,692	$2,664	0.24%	0.19%	0.27%	0.56%
S&P 500	$789,024	$893,292	$983,841	100.00%	100.00%	100.00%	100.00%

P/E Ratios

• Trading at 15.80x 2010, 13.95x 2011 earnings, or earnings yields of 6.33% and 7.17%, respectively. P/E for 2012 at 12.67x, or earnings yield of 7.89%.
• Earnings Yields still attractive relative to 10-year T-Note rate of 2.03% and 30-year bond rate of 3.10%.
• 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 $56.81 in 2009 rising to $83.20 in 2010. Currently expected to earn $94.23 in 2011 and $103.75 for 2012.

P/E Ratios
P/E	2009	2010	2011	2012
Auto	187.01	12.07	10.28	10.30
Oils and Energy	22.33	14.84	10.87	10.55
Finance	53.54	12.61	13.28	10.56
Aerospace	16.00	13.14	12.35	11.75
Medical	14.73	13.35	12.38	11.98
Basic Materials	27.46	17.64	13.30	12.35
Industrial Products	27.32	20.03	15.12	12.85
Computer and Tech	25.21	17.15	13.99	12.93
Conglomerates	18.02	16.21	14.84	13.07
Consumer Discretionary	23.83	19.34	16.18	14.33
Transportation	30.00	16.65	17.22	14.60
Utilities	15.62	15.72	15.32	15.00
Consumer Staples	19.64	17.59	16.20	15.04
Business Service	24.16	21.27	18.14	15.91
Retail/Wholesale	22.69	19.76	17.89	15.99
Construction	NM	36.32	41.03	26.06
S&P 500	23.14	15.80	13.95	12.67

Data in this report, unless stated otherwise, is through the close on Thursday 1/19/2012.

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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