Key Points:

• The Fourth Quarter earnings season is weak, but getting better as it progresses.  Total reported earnings growth is 6.31% for the 409 firms of the S&P 500 (81.8%) that have reported so far, but those represent 87.8% of total expected earnings.  Ex-Financials growth is 8.47% year over year.  Total revenue growth 7.43%, 7.67% ex-Financials.  Median earnings surprise 2.31% and median sales surprise 0.26%.  Net margins reported fall to 9.65% from 9.75% last year.
• Sharp slowdown from the 17.78% earnings and 13.08% revenue growth those same 409 firms reported in the third quarter.
• For the remaining 91 firms, year-over-year growth expected to fall to -2.32% in fourth quarter, -11.91% excluding Financials.  Dramatic slowdown, but easy hurdle to clear.  Revenue growth expected to slow to negative 5.45%, +5.79% ex-Financials.  Remaining net margin to rise to 5.84% from 5.65% a year ago.
• Full-year total earnings for the S&P 500 jumped 44.4% in 2010, expected to rise 15.3% further in 2011.  Growth to continue in 2012 with total net income expected to rise 9.5%.  Financials major earnings driver in 2010.  Excluding Financials, growth was 28.2% in 2010; expected to be 17.3% in 2011 and 6.8% in 2012.  Growth of 11.1%, 12.2% ex-Financials expected for 2013.
• Total revenues for the S&P 500 rise 7.94% in 2010, expected to be up 7.78% in 2011, and 2.39% in 2012.  Excluding Financials, revenues up 9.34% in 2010, expected to rise 11.02% in 2011 and 3.23% in 2012.  For 2013, 4.51% growth expected, 4.62% ex-Financials.  
• Annual Net Margins marching higher, from 5.88% in 2008 to 6.27% in 2009 to 8.39% for 2010, 8.96% expected for 2011 and 9.52% in 2012.  Margin expansion major source of earnings growth.  Net margins ex-Financials 7.79% in 2008, 6.93% in 2009, 8.13% for 2010, 8.96% expected in 2011, 8.88% in 2012. For 2013 10.20% expected, 9.52% ex-Financials.
• Revisions ratio for full S&P 500 at 0.73 for 2012 (bearish), at 0.82 for 2013 (neutral).  Ratio of firms with rising to falling mean estimates at 0.73 for 2012 (bearish), 0.73 (bearish) for 2013.  Total revisions activity near seasonal peak.  
• S&P 500 earned $788.8 billion in 2010, expected to climb to $895.9 billion in 2011.  In 2012, the 500 are collectively expected to earn $981.2 billion. For 2013, $1.0904 Trillion expected.  
• S&P 500 earned $56.79 in 2009: $81.96 in 2010 and $94.51 in 2011 expected bottom up.  For 2012, $103.51 expected, $114.99 for 2013.  Puts P/E's at 14.4 for 2011, and 13.12x for 2012 and 11.8x for 2013, very attractive relative to 10-year T-note rate of 1.98%.  

The Earnings Picture

While we started out the fourth quarter earnings season on a very weak note, the picture has improved as the season has worn on.  I would not want to suggest that this has been a good earnings season, but it is not the ugly one it appeared to be just a few weeks ago.

So far 409, or 81.8% of the firms have reported.  However, assuming that all the remaining firms report exactly in like with expectations, then 87.8% 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 2.31% and the ratio is 2.33.  Both up from last week, and up for the fourth week in a row, but still well below normal.  

While we don't have the drama of multi-billion-dollar bank losses, this is still the weakest 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 true, but we are running out of real estate to catch up.  

Total net income for the 409 that have reported is 6.31% above a year ago.  It is about a third the 17.78% growth rate that the same 409 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 8.47%, down from 20.16% growth in the third quarter.  

Sequentially, total net income so far is 6.45% below the third quarter, or 5.90% lower ex-Financials.  The pressure on the growth rate is coming from both the numerator and the denominator (year-ago earnings growth was strong, and thus tougher comps).

Bar Set Lower

The bar is set low for the remaining 91 firms, and significantly lower than the results we have seen so far.  They are expected to see year-over-year growth of negative 2.32%.  If we exclude the Financial sector, earnings are expected to be 11.91% below last year's.  In the third quarter, the remaining firms had growth of negative 6.96%, but it was just into positive territory at 0.80% if the financials are excluded.  

In other words, we have started out weak, and it is expected to get worse.  Provided the remaining firms report in line with expectations, the final year-over-year growth should be 5.15%, up from 4.80% expected last week.

Revenue growth has held up better, with the 409 reporting 7.43% growth.   If we exclude the Financials that have reported, revenue is up 7.67% year over year.  The 91 are expected to see revenue growth to slow to negative 5.45% in total and positive 5.79% excluding the Financials.  In the third quarter, the 91 reported revenue growth of 3.95% in total and 6.21% excluding the financials.  

Net Margin Expansion Coming to an End

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 409, net margins have come in at 9.65%, down from 9.75% a year ago, and down from 10.41% in the third quarter.  For the 91, margins are expected to be much lower, but they are lower margin businesses to begin with.  Retailers, for example, account for 33.6% of the remaining earnings expected.  They, however, are expected to rise to 5.84% from 5.65% last year, and up from the 4.75% in the third quarter. That is entirely due to the remaining Financials.

Excluding Financials, net margins of just 5.04% expected, down from 6.05% a year ago and 5.05% 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, but 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.  In 2008, overall net margins were just 5.88%, rising to 6.27% in 2009.  They hit 8.38% in 2010 and are expected to continue climbing to 8.96% in 2011 and 9.59% in 2012.  The very preliminary expectation is that they will rise to 10.20% in 2013.  

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 8.13% in 2010.  They are expected to rise to 8.59% in 2011.  They are expected to rise to 8.88% in 2012, and then up to 9.52% in 2013.  There should be some caution in using the 2013 numbers, as the analyst sample sizes are still well below those for 2012, especially when it comes to revenues.

Long View: Income & Earnings

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 $895.9 billion, or increases of 44.4% and 15.3%, respectively.  The expectation is for 2012 to have total net income come close to $1 trillion mark to $981.2 billion, for growth of 9.5%.  Total net income is expected to finally pass the $1 trillion mark in 2013 at $1.0904 trillion.  

The "EPS" for the S&P 500 is expected to be over the $100 "per share" level for the first time at $103.51 in 2012.  That is up from $56.79 for 2009, $81.96 for 2010, and $94.51 for 2011.  In an environment where the 10-year T-note is yielding 1.98%, a P/E of 14.4x based on 2011 and 13.1x based on 2012 earnings looks attractive.  The P/E based on 2013 earnings is just 11.8x.  

Estimate Revisions to Peak Soon

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 2012 earnings now stands at 0.73, or more than four cuts for every three increases.  The picture for FY2, or mostly 2013, is only slightly better, with a revisions ratio of just 0.82. The widespread cuts are also confirmed by the ratio of firms with rising mean estimates to falling mean estimates, which now stand at 0.93 and 0.73, 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, the 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 60 S&P 500 firms scheduled to report.  Thus by the end of next week, earnings season will effectively be over, with 93.8% of the reports in.  Just two firms, Wal-Mart ( WMT ) and Berkshire Hathaway ( BRK.B ) account for almost 30% of the remaining expected earnings.  

Income Surprises

• So far 409  firms, or 81.8%, have reported fourth quarter results.  Total Income Growth at a 6.31%. We have a 2.33 surprise ratio, and 2.31% median surprise, both weaker than normal, but better than last week. Positive surprises for 63.3% of all firms reporting.
• Positive year-over-year growth for 263, falling EPS for 143 firms, 1.83 ratio, 64.1% of all firms reporting have higher EPS than last year.
• Twelve sectors have at 80% of their results in, Aerospace done. Provided remaining firms report in line, 87.8% of total earnings for quarter in.
• Aerospace leads by wide margin, Discretionary and Construction also strong.  Utilities, Materials, and Transports 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	9.61%	100.00%	10.12	8	0	5	4
Consumer Discretionary	12.96%	93.33%	4.23	21	4	18	9
Construction	75.83%	81.82%	3.57	5	3	6	3
Computer and Tech	17.82%	84.93%	3.26	44	16	30	31
Consumer Staples	4.30%	89.19%	3.23	25	4	23	10
Conglomerates	12.31%	87.50%	3.05	6	0	7	0
Auto	3.56%	87.50%	2.59	4	3	6	1
Oils and Energy	9.65%	70.73%	2.44	17	11	20	9
Medical	3.24%	88.64%	2.33	27	7	25	14
Industrial Products	16.66%	86.36%	2.27	11	7	14	5
Business Service	14.47%	78.95%	2.05	11	1	15	0
Finance	-4.28%	94.87%	1.23	41	27	43	30
Retail/Wholesale	4.82%	57.45%	0.91	14	6	20	6
Transportation	17.77%	88.89%	0.80	4	3	7	1
Basic Materials	-22.56%	83.33%	0.78	10	8	10	10
Utilities	-12.83%	56.10%	0.00	11	11	13	10
S&P 500	6.31%	81.80%	2.31	259	111	262	143

Sales Surprises

• Revenue growth of 7.43% among the 409 that have reported, median surprise 0.26 (weak), surprise ratio of 1.28 (weak).  Positive surprise for 56.0%.  
• Growing Revenues outnumber falling revenues by ratio of 2.95 (solid), 74.3% have higher sales than last year.
• A week start to the season, but improving as the season wears on.
• Energy, Auto and Materials lead, Utilities, Aerospace and Transports 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	13.36%	70.73%	3.816	23	6	27	2
Auto	11.50%	87.50%	3.244	4	3	7	0
Basic Materials	7.52%	83.33%	0.823	12	8	18	2
Construction	5.97%	81.82%	0.761	5	4	7	2
Retail/Wholesale	9.62%	57.45%	0.679	18	9	26	1
Medical	4.25%	88.64%	0.458	25	14	35	4
Computer and Tech	14.35%	84.93%	0.375	37	25	37	24
Business Service	10.53%	78.95%	0.327	11	4	15	0
Finance	-1.72%	94.87%	0.169	41	32	42	32
Industrial Products	12.64%	86.36%	0.146	10	9	16	3
Consumer Staples	4.37%	89.19%	-0.133	15	18	26	7
Consumer Discretionary	11.30%	93.33%	-0.718	10	18	22	6
Conglomerates	-1.72%	87.50%	-0.738	2	5	5	2
Transportation	11.22%	88.89%	-0.749	2	6	8	0
Aerospace	0.78%	100.00%	-2.054	3	6	3	6
Utilities	3.57%	56.10%	-6.573	11	12	10	12
S&P 500	7.43%	81.80%	0.264	229	179	304	103

Reported Quarterly Growth: Total Net Income

• The total net income for the 409 that have reported so far is 6.31% above what was reported in the fourth quarter of 2010, down sharply from 17.78% growth the same 409 firms reported in the third quarter.  Excluding Financials, net income up 8.47%, down from 20.16% growth reported in the third quarter.
• Sequential earnings fall 6.45% for the 409 that have reported, down 5.90% ex-Financials.
• Growth (for the 409 firms) to fall to -1.86% in the first quarter, and -0.98% ex-Financials.
• Total net income reported (409 firms) $204.6 billion, vs. $192.4 billion year ago, but down from $218.6 billion in third quarter.  Final growth projected to be just 5.15%, up from 4.80% 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	-61.35%	-27.11%	75.83%	120.63%	18.93%
Computer and Tech	-22.98%	25.20%	17.82%	5.24%	12.95%
Transportation	-17.46%	3.84%	17.77%	20.64%	13.24%
Industrial Products	5.96%	-10.97%	16.66%	5.78%	28.05%
Business Service	1.05%	3.21%	14.47%	16.38%	21.98%
Consumer Discretionary	-28.06%	0.46%	12.96%	3.26%	14.18%
Conglomerates	-11.57%	-3.14%	12.31%	4.17%	24.87%
Oils and Energy	5.58%	-20.69%	9.65%	-3.57%	63.07%
Aerospace	-24.58%	6.63%	9.61%	0.21%	12.44%
Retail/Wholesale	0.98%	2.49%	4.82%	0.71%	8.35%
Consumer Staples	-14.84%	-6.02%	4.30%	-1.69%	5.91%
Auto	30.10%	-37.60%	3.56%	-26.17%	23.09%
Medical	3.86%	-7.90%	3.24%	-3.10%	6.83%
Finance	12.17%	-11.87%	-4.28%	-5.77%	6.80%
Utilities	30.93%	-42.86%	-12.83%	-8.93%	11.81%
Basic Materials	63.33%	-33.13%	-22.56%	-16.40%	36.16%
S&P	-3.19%	-6.45%	6.31%	-1.86%	17.78%
.	-5.95%	-5.40%	8.47%	-0.98%	20.16%

Expected Quarterly Growth: Total Net Income

• Total net income (for the 91 yet to report) is expected to be 2.32% below what was reported in the fourth quarter of 2010, versus negative 6.96% growth in the third quarter.  Excluding Financials, negative growth of 11.91%, down from +0.80% reported in the third quarter.  
• Relative to the third quarter total net income to rise 25.62%, ex-Financials to rise 8.67%.  
• Financials and Staples the only sectors to see growth accelerate from the third quarter.  Six sectors expected to see negative year-over-year growth.
• Eight sectors expected to earn less in fourth quarter than in the third, three 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
Aerospace	na	na	Na	na	na
Finance	-64.56%	371.25%	100.13%	-55.19%	-63.80%
Construction	-14.06%	8.18%	38.27%	41.29%	2044.44%
Industrial Products	11.86%	-8.81%	20.24%	15.34%	20.81%
Consumer Staples	-8.66%	-1.41%	14.51%	2.73%	11.43%
Basic Materials	-3.01%	-0.10%	13.73%	27.22%	17.51%
Auto	4.72%	-15.31%	8.17%	6.14%	15.15%
Oils and Energy	-10.00%	-9.12%	4.56%	-8.76%	17.85%
Medical	4.66%	2.82%	3.49%	6.62%	8.46%
Transportation	-3.44%	-7.86%	1.64%	4.62%	11.46%
Retail/Wholesale	-29.55%	47.48%	-2.80%	2.78%	7.21%
Utilities	33.08%	-45.69%	-7.09%	-1.49%	1.31%
Business Services	-53.07%	16.04%	-13.26%	-0.91%	3.04%
Consumer Discretionary	630.04%	251.04%	-25.05%	-7.18%	+ to -
Computer and Tech	22.73%	-12.34%	-30.85%	-21.21%	-17.22%
Conglomerates	266.67%	79.90%	+ to -	715.28%	+ to -
S&P 500	-17.02%	25.62%	-2.32%	-10.26%	-6.96%
Excluding Financial	-6.92%	8.67%	-11.91%	-2.33%	0.80%

Quarterly Growth: Total Revenues Reported

• Revenue growth (for the 409 that have reported) at 7.43%, down from the 13.08% growth posted in the third quarter.  Growth ex-Financials 7.67%, down from 13.87%.
• Slowdown expected to continue in first quarter, with 6.72% growth, 1.15% ex-Financials.
• Sharp slowdown despite improving U.S. economy, may reflect Europe and the dollar.
• Sequentially revenues 0.91% higher than in the third quarter, up 1.24% ex-Financials.
• Aerospace and Utilities the only sectors seeing an acceleration in Revenue growth.
• Six 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
Computer and Tech	-11.24%	12.98%	14.35%	22.07%	15.08%
Oils and Energy	-6.29%	-1.84%	13.36%	4.07%	31.43%
Industrial Products	2.89%	-3.87%	12.64%	6.13%	18.26%
Auto	-5.03%	2.30%	11.50%	8.00%	18.21%
Consumer Discretionary	-9.23%	3.48%	11.30%	19.31%	15.63%
Transportation	-2.36%	1.33%	11.22%	12.24%	13.40%
Business Service	-5.52%	3.72%	10.53%	11.55%	13.71%
Retail/Wholesale	0.39%	1.85%	9.62%	7.68%	10.57%
Basic Materials	3.99%	-3.54%	7.52%	-0.02%	20.12%
Construction	-6.19%	-6.72%	5.97%	13.78%	8.45%
Consumer Staples	-18.21%	0.06%	4.37%	13.23%	11.28%
Medical	-0.89%	1.47%	4.25%	4.56%	7.66%
Utilities	3.56%	-4.31%	3.57%	-0.33%	1.87%
Aerospace	-8.79%	6.20%	0.78%	15.57%	-1.04%
Conglomerates	-6.84%	3.36%	-1.72%	4.95%	5.59%
Finance	-4.32%	-2.64%	-1.72%	-3.80%	2.05%
S&P 500	-5.05%	0.91%	7.43%	6.72%	13.08%
Excluding Financial	-5.57%	1.24%	7.67%	1.15%	13.87%

Quarterly Growth: Total Revenues Expected

• Revenue growth for the 91 yet to report expected to fall to negative 5.45%, from the 3.95% growth posted in the third quarter.  Growth ex-Financials 5.79%, down from 6.21% in 3rd quarter.
• Sequentially revenues up 2.17% from the third quarter, up 9.02% ex-Financials.
• Five sectors expecting revenue growth over 10%, Finance to see sharp 71.44% year-over-year drop in revenues.
• Year-over-year revenue growth in first quarter expected to be 2.83%, 3.01% 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
Aerospace	NA	NA	NA	NA	NA
Oils and Energy	-4.30%	-6.48%	37.16%	33.37%	49.73%
Construction	4.63%	6.78%	22.12%	37.85%	8.50%
Industrial Products	10.65%	-2.91%	15.67%	22.67%	20.45%
Utilities	-21.34%	2.66%	14.77%	-17.39%	5.22%
Basic Materials	22.04%	4.85%	14.54%	43.28%	8.54%
Auto	10.09%	-7.40%	8.37%	12.64%	11.35%
Consumer Staples	-9.81%	8.80%	5.93%	4.05%	8.46%
Retail/Wholesale	-8.17%	14.82%	4.83%	6.24%	6.20%
Medical	-7.19%	1.38%	3.36%	-5.37%	4.20%
Transportation	4.13%	-0.44%	1.07%	13.96%	-3.72%
Business Services	-7.86%	4.43%	0.83%	1.91%	3.78%
Computer and Tech	-0.99%	-0.25%	-1.08%	-1.83%	-1.24%
Consumer Discretionary	-24.52%	33.15%	-12.13%	-57.52%	-15.77%
Conglomerates	-34.33%	55.51%	-37.37%	-15.14%	26.88%
Finance	147.31%	-56.81%	-71.44%	1.40%	-12.10%
S&P 500	0.85%	2.17%	-5.45%	2.83%	3.95%
Excluding Financial	-7.60%	9.02%	5.79%	3.01%	6.21%

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 409 that have reported fall to 9.65% from 9.75% a year ago, and down from 10.41% in the third quarter.  Net margins ex-Financials rise to 8.67% from 8.61% a year ago but down from 9.82% 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	17.62%	20.31%	18.32%	19.21%	18.14%	19.71%
Medical	14.71%	14.04%	15.47%	15.41%	15.73%	14.18%
Business Service	14.89%	13.92%	13.99%	13.44%	13.48%	13.44%
Finance	13.80%	11.77%	13.01%	9.21%	13.48%	12.09%
Consumer Staples	11.47%	11.02%	11.73%	11.47%	10.80%	11.02%
Consumer Discretionary	8.26%	10.42%	10.74%	9.65%	8.66%	10.27%
Conglomerates	9.63%	10.14%	10.83%	9.97%	9.04%	8.88%
Transportation	7.45%	8.81%	8.60%	8.52%	6.77%	8.32%
Industrial Products	8.26%	8.02%	8.66%	8.54%	8.53%	7.74%
Aerospace	5.84%	7.06%	7.03%	6.88%	6.14%	6.49%
Oils and Energy	7.84%	6.96%	8.62%	8.42%	7.93%	7.20%
Utilities	7.35%	5.81%	9.73%	8.54%	8.33%	6.90%
Basic Materials	7.56%	4.81%	6.94%	8.95%	9.40%	6.68%
Auto	4.87%	3.56%	5.83%	6.72%	6.77%	3.83%
Retail/Wholesale	3.33%	3.31%	3.29%	3.26%	3.55%	3.46%
Construction	1.26%	3.07%	3.93%	3.24%	0.61%	1.85%
S&P 500	9.84%	9.65%	10.41%	9.92%	10.16%	9.75%
Excluding Financial	8.64%	8.67%	9.28%	9.29%	8.82%	8.61%

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 91 that have not reported.
• Net margins expected to rise to 5.84% from 5.65% a year ago, and up from 4.75% in the third quarter.  Net margins ex-Financials expected to fall to 5.04% from 6.05% a year ago and down from 5.05% in the third quarter.  
• Margin expansion is 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.
• Remaining firms naturally lower margin businesses than those that have reported, with so few left, should not significantly change overall picture.

Quarterly: Net Margins Expected
Net Margins	Q1 2012 Expected	Q4 2011 Expected	3Q 2011 Reported	2Q 2011 Reported	1Q 2011 Reported	4Q 2010 Reported
Aerospace	NA	NA	NA	NA	NA	NA
Finance	3.34%	23.29%	2.13%	8.97%	7.55%	3.32%
Basic Materials	13.40%	16.86%	17.69%	14.54%	15.09%	16.98%
Industrial Products	11.68%	11.55%	12.30%	11.93%	12.42%	11.11%
Oils and Energy	10.29%	10.95%	11.26%	13.40%	15.05%	14.36%
Consumer Staples	7.10%	7.01%	7.74%	7.69%	7.19%	6.49%
Transportation	5.72%	6.17%	6.66%	6.01%	6.23%	6.13%
Computer and Tech	7.60%	6.13%	6.97%	7.38%	9.46%	8.76%
Medical	6.19%	5.49%	5.41%	5.16%	5.49%	5.48%
Business Service	2.64%	5.19%	4.67%	4.86%	2.72%	6.03%
Utilities	8.36%	4.94%	9.34%	6.76%	7.01%	6.11%
Auto	4.02%	4.23%	4.63%	4.77%	4.27%	4.24%
Consumer Discretionary	40.34%	4.17%	-3.68%	-2.61%	18.46%	4.89%
Retail/Wholesale	3.17%	4.14%	3.22%	3.79%	3.28%	4.46%
Construction	2.20%	2.68%	2.65%	2.87%	2.15%	2.37%
Conglomerates	40.59%	-15.99%	-123.73%	24.30%	4.23%	286.18%
S&P 500	4.89%	5.84%	4.75%	5.68%	5.60%	5.65%
Excluding Financial	5.08%	5.04%	5.05%	5.24%	5.35%	6.05%

Annual Total Net Income Growth

• Following a rise of just 2.4% in 2009, total earnings for the S&P 500 jumped 44.4% in 2010, 15.3% further expected in 2011.  Growth ex-Financials 28.2% in 2010, 17.3% in 2011.
• For 2012, 9.5% growth expected, 6.8% ex-Financials.  For 2013, 11.1% and 12.2% 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, 12 in 2013.  Energy and Health Care expected to grow less than 5% in 2012. Aerospace and Utilities only sectors to decline.  Slow growers in 2011 to be high growers in 2012.
• Cyclical/Commodity sectors lead in earnings growth 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	2010	2011	2012	2013
Construction	- to +	-0.05%	38.14%	38.87%
Finance	289.94%	4.81%	24.92%	6.05%
Transportation	80.26%	-3.00%	18.26%	14.68%
Conglomerates	11.13%	6.29%	16.52%	13.30%
Business Service	13.57%	17.69%	14.24%	14.01%
Industrial Products	36.40%	37.14%	13.69%	14.39%
Consumer Discretionary	23.18%	20.13%	12.55%	16.32%
Computer and Tech	47.14%	22.47%	12.06%	12.61%
Retail/Wholesale	14.81%	10.64%	11.21%	15.65%
Auto	1448.79%	6.84%	7.56%	17.00%
Consumer Staples	11.65%	8.89%	5.70%	9.52%
Basic Materials	56.29%	30.87%	4.78%	18.27%
Medical	10.33%	8.09%	2.05%	6.63%
Oils and Energy	50.66%	36.49%	0.58%	12.03%
Aerospace	21.78%	11.50%	-3.09%	11.82%
Utilities	-0.64%	4.65%	-3.55%	9.23%
S&P	44.39%	15.26%	9.52%	11.13%

Annual Total Revenue Growth

• The number of revenue estimates is smaller than earnings estimates, especially for 2013.
• Total revenues for the S&P 500 expected to rise 7.94% in 2011, 2.39% in 2012, early expectation for 4.62% growth in 2013.
• 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, Transports and Tech also strong.
• All sectors but Staples, Finance and Aerospace expected to show positive top-line growth in 2011. Twelve sectors see 2012 growth, 15 see 2013 growth.
• Revenue growth significantly different if Financials are excluded, down 10.56% in 2009 but growth of 9.34% in 2010, 11.02% in 2011, and 3287% in 2012.  Early expectation for 4.62% growth in 2013.

Annual Total Revenue Growth
Sales Growth	2010	2011	2012	2013
Construction	0.47%	4.02%	10.99%	10.23%
Industrial Products	12.34%	19.87%	8.94%	6.70%
Computer and Tech	15.51%	13.74%	7.82%	7.86%
Transportation	10.70%	12.70%	7.75%	6.96%
Basic Materials	10.76%	18.30%	7.13%	6.10%
Retail/Wholesale	4.10%	6.67%	5.94%	4.85%
Consumer Discretionary	5.30%	12.24%	5.44%	4.77%
Conglomerates	0.94%	3.70%	4.08%	6.43%
Aerospace	-0.34%	-1.05%	3.89%	2.65%
Business Service	4.81%	9.28%	3.70%	-1.48%
Utilities	2.13%	5.10%	3.20%	3.28%
Auto	9.21%	18.34%	2.16%	6.91%
Medical	11.40%	5.31%	0.85%	2.96%
Oils and Energy	23.74%	22.01%	-1.16%	2.61%
Finance	0.07%	-12.06%	-4.55%	3.58%
Consumer Staples	4.79%	7.16%	-5.53%	3.67%
S&P 500	7.94%	7.78%	2.39%	4.51%
Excluding Financial	9.34%	11.02%	3.28%	4.62%

Annual Net Margins

• Net Margins marching higher, from 5.88% in 2008 to 6.27% in 2009 to 8.39% for 2010, 8.97% expected for 2011.  Trend expected to continue into 2012 with net margins of 9.61% expected.   Rise to 10.20% expected for 2013.
• Financials significantly distort overall net margins. Net margins ex-Financials 7.78% in 2008, 6.93% in 2009, 8.13% for 2010, 8.59% expected in 2011.  Expected to rise to 8.88% in 2012, then to 9.52% in 2013.  
• Financials net margins soar from -8.42% in 2008 to15.52% expected for 2012, 15.90% for 2013.
• 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.  Thirteen sectors expected to see margin expansion in 2012.  All sectors see expansion in 2013.
• 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	2010A	2011A	2012E	2013E
Computer and Tech	14.97%	16.12%	16.76%	17.49%
Finance	9.95%	11.86%	15.52%	15.90%
Medical	12.75%	13.09%	13.25%	13.72%
Business Service	10.82%	11.65%	12.84%	14.86%
Consumer Staples	10.31%	10.48%	11.72%	12.38%
Conglomerates	9.02%	9.24%	10.35%	11.01%
Consumer Discretionary	8.49%	9.08%	9.69%	10.76%
Industrial Products	7.35%	8.41%	8.78%	9.41%
Transportation	9.28%	7.98%	8.76%	9.40%
Oils and Energy	7.23%	8.08%	8.23%	8.98%
Basic Materials	7.08%	7.83%	7.66%	8.54%
Utilities	7.88%	7.85%	7.33%	7.76%
Aerospace	5.86%	6.60%	6.16%	6.71%
Auto	5.24%	4.73%	4.98%	5.45%
Retail/Wholesale	3.27%	3.40%	3.56%	3.93%
Construction	2.64%	2.54%	3.17%	3.99%
SP& 500	8.38%	8.96%	9.59%	10.20%
Excluding Financial	8.13%	8.59%	8.88%	9.52%

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

• Revisions ratio for full S&P 500 at 0.73, up from 0.67, still very bearish.  Total revisions activity approaching seasonal peak.
• Conglomerates lead, Business Service also strong. Three with two cuts per increase or more.  Utilities, Energy and Aerospace very weak.
• Ratio of firms with rising to falling mean estimates at 0.73 up from 0.67, a bearish reading.
• Total number of revisions (4-week total) near seasonal peak at 4,685, up from 4,454 last week (5.2%).  Increases at 1974, up from 1,794 (10.05), cuts at 2,711 up from 2,660 (1.0%).

The Zacks Revisions Ratio: 2012
Sector	%Ch Curr Fiscal Yr Est - 4 wks	# Firms Up	# Firms Down	# Ests Up	# Ests Down	Revisions Ratio	Firms up/down
Conglomerates	1.63	5	2	38	11	3.45	2.50
Business Service	-0.49	10	8	100	55	1.82	1.25
Retail/Wholesale	-0.58	26	15	257	178	1.44	1.73
Construction	-1	6	5	39	28	1.39	1.20
Computer and Tech	0.43	38	29	375	331	1.13	1.31
Consumer Discretionary	-1.48	17	12	153	154	0.99	1.42
Transportation	-0.32	2	7	55	60	0.92	0.29
Auto	-1.91	3	5	29	47	0.62	0.60
Finance	-1.95	28	48	317	521	0.61	0.58
Basic Materials	-3.07	9	14	71	122	0.58	0.64
Industrial Products	-2.82	7	13	61	105	0.58	0.54
Consumer Staples	-0.53	16	19	88	154	0.57	0.84
Medical	-1.02	13	31	165	308	0.54	0.42
Aerospace	-1.89	3	6	37	78	0.47	0.50
Oils and Energy	-7.98	8	34	136	357	0.38	0.24
Utilities	-2.07	10	27	53	202	0.26	0.37
S&P 500	-1.67	201	275	1974	2711	0.73	0.73

Earnings Estimate Revisions: Next Fiscal Year
The Zacks Revisions Ratio: 2013

• Revisions ratio for full S&P 500 at 0.82 up from 0.75, now in neutral territory.
• The low Revisions and Firm Up/Down Ratios are a troubling sign for the market, especially now that total activity is high.
• Six sectors have positive revisions ratios (above 1.0).  Utilities very weak, has more than two cuts per increase.
• Ratio of firms with rising estimate to falling mean estimates at 0.73, up from 0.71.  Still in bearish territory.
• Total number of revisions (4-week total) at 2.972, up from 2,744 (8.3%).    
• Increases at 1.337, up from 1,177 last week (3.6%), cuts at 1,635, up from 1,567 (4.3%).

The Zacks Revisions Ratio: 2013
Sector	%Ch Next Fiscal Yr Est - 4 wks	# Firms Up	# Firms Down	# Ests Up	# Ests Down	Revisions Ratio	Firms up/down
Business Service	0.33	10	7	58	24	2.42	1.43
Conglomerates	0.44	4	3	21	13	1.62	1.33
Retail/Wholesale	-0.26	26	18	154	98	1.57	1.44
Construction	-8.24	3	8	21	18	1.17	0.38
Computer and Tech	-0.88	30	37	241	216	1.12	0.81
Transportation	-0.25	4	5	34	31	1.10	0.80
Auto	-1.83	3	5	21	22	0.95	0.60
Basic Materials	-0.66	11	11	55	58	0.95	1.00
Consumer Discretionary	-1.36	14	15	99	105	0.94	0.93
Aerospace	-1.04	3	6	27	33	0.82	0.50
Finance	-1.17	31	46	237	310	0.76	0.67
Medical	-1.01	13	31	128	225	0.57	0.42
Industrial Products	-0.87	10	10	36	64	0.56	1.00
Consumer Staples	-0.40	15	20	56	100	0.56	0.75
Oils and Energy	-2.68	13	27	114	208	0.55	0.48
Utilities	-3.54	11	28	35	110	0.32	0.39
S&P 500	-1.34	201	277	1337	1635	0.82	0.73

Total Income and Share

• S&P 500 earned $538.6 billion in 2009, rising to earn $788.8 billion in 2010, $895.9 billion expected in 2011.  Earnings to approach the $1 trillion mark in 2012 at $981.2 billion, pass in 2013 at $1.0904 trillion.
• 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 17.3% hen slip to 16.5% in 2013.  Energy share also rising going from 11.9% in 2009 to 14.7% in 2011, dip to 13.5% in 2012, 13.6% in 2013.
• Medical share of total earnings exceeds market cap share (index weight), but earnings share expected to shrink from 17.3% in 2009 to 10.7% in 2013, 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 overweight sectors where earnings shares exceed market cap shares.

Total Income and Share
Income ($ Bill)	Total Net Income $ 2011	Total Net Income $ 2012	Total Net Income $ 2013	% Total S&P Earn 2011	% Total S&P Earn 2012	% Total S&P Earn 2013	% Total S&P Mkt Cap
Computer and Tech	$165,526	$185,491	$208,875	18.48%	18.90%	19.16%	19.29%
Finance	$135,670	$169,478	$179,740	15.14%	17.27%	16.48%	14.46%
Oils and Energy	$131,775	$132,536	$148,483	14.71%	13.51%	13.62%	11.45%
Medical	$107,156	$109,352	$116,598	11.96%	11.14%	10.69%	10.39%
Consumer Staples	$67,928	$71,800	$78,634	7.58%	7.32%	7.21%	8.62%
Retail/Wholesale	$64,006	$71,180	$82,316	7.14%	7.25%	7.55%	9.03%
Utilities	$50,301	$48,515	$52,995	5.61%	4.94%	4.86%	5.88%
Conglomerates	$29,385	$34,239	$38,792	3.28%	3.49%	3.56%	3.55%
Consumer Discretionary	$30,167	$33,953	$39,495	3.37%	3.46%	3.62%	3.97%
Basic Materials	$31,560	$33,067	$39,109	3.52%	3.37%	3.59%	3.35%
Industrial Products	$22,749	$25,864	$29,586	2.54%	2.64%	2.71%	2.68%
Business Service	$16,666	$19,038	$21,705	1.86%	1.94%	1.99%	2.48%
Transportation	$13,831	$16,357	$18,759	1.54%	1.67%	1.72%	1.81%
Aerospace	$15,101	$14,635	$16,365	1.69%	1.49%	1.50%	1.37%
Auto	$12,173	$13,092	$15,319	1.36%	1.33%	1.40%	1.13%
Construction	$1,913	$2,643	$3,670	0.21%	0.27%	0.34%	0.55%
S&P 500	$895,907	$981,241	$1,090,441	100.00%	100.00%	100.00%	100.00%

P/E Ratios

• Trading at 16.57x 2010, 14.37x 2011 earnings, or earnings yields of 6.04% and 6.96%, respectively.  P/E for 2012 at 13.12x or earnings yield of 7.62%.  Very preliminary 2013 P/E of 11.81, or earnings yield of 8.47%.
• Earnings Yields still attractive relative to 10-year T-Note rate of 1.98% and 30-year bond rate of 3.14%.
• No single-digit P/E sectors for 2012, Autos, Oil and Finance Cheapest for 2012 and 2013.
• Construction has highest P/E for all four years by a wide margin.
• S&P 500 earned $56.79 in 2009 rising to $81.96 in 2010.  Currently expected to earn $94.51 in 2011 and $103.51 for 2012.  Preliminary 2013 estimate $114.99.

P/E Ratios
P/E	2010	2011	2012	2013
Finance	14.38	13.72	10.98	10.36
Auto	12.75	11.93	11.09	9.48
Oils and Energy	15.27	11.19	11.13	9.93
Aerospace	13.07	11.72	12.09	10.82
Medical	13.49	12.48	12.23	11.47
Basic Materials	17.89	13.67	13.05	11.03
Industrial Products	20.79	15.16	13.34	11.66
Conglomerates	16.53	15.55	13.35	11.78
Computer and Tech	18.37	15.00	13.39	11.89
Transportation	16.32	16.82	14.23	12.40
Consumer Discretionary	20.35	16.94	15.05	12.94
Consumer Staples	17.80	16.35	15.47	14.12
Utilities	15.74	15.04	15.59	14.28
Retail/Wholesale	20.11	18.18	16.34	14.13
Business Service	22.54	19.15	16.77	14.71
Construction	37.16	37.14	26.89	19.36
S&P 500	16.57	14.37	13.12	11.81

Data in this report, unless stated otherwise, is through the close on Thursday 2/16/2012.

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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