Early Reports Better than Expected - Earnings Trends

Key Points:

Second-quarter total net income expected to be down 34.9% year over year
Staples only sector expected to post positive growth in second quarter
Seven sectors expected to decline more than 25%
Financials expected to rebound after disastrous 2008
Early positive surprises lead disappointments by 7:1 margin
Third quarter expected to be down 22.9% year over year
Estimate cuts for 2009 again outnumber increases slightly
Full year 2009 expected to fall 13.6%, implies strong growth in fourth quarter
Bottom-up estimate for S&P 500 now $59.72 in 2009 versus $59.60 last week.
S&P 500 now expected to earn $74.24 in 2010 versus $74.09 last week

Total Net Income Growth

Early results ugly with total net income down 23.4%, but only 27 firms have reported
Total net income reported $5.8 billion, versus $7.5 billion last year and $5.5 billion in Q1
Remaining firms expected to post 35.3% decline
Staples expected to lead with small increase, followed by small declines in Health Care and Utilities
Materials and Energy expected to see massive year-over-year declines

Total Net Income Growth (Reported)
Sector	Q4 ’08 A	Q1 ’09 A	Q2 ’09 A	Q3 ’09 E	2008 A	2009 E	2010 E
Cons. Disc,	1.04%	18.24%	24.80%	-20.93%	16.11%	-4.08%	19.06%
Cons. Stap.	-1.47%	-18.94%	-6.38%	-4.98%	14.77%	-6.06%	9.94%
Technology	-8.36%	-17.13%	-17.90%	-14.92%	28.22%	-13.58%	39.66%
Industrials	2.92%	-75.32%	-56.03%	-66.63%	-17.68%	-48.38%	31.12%
Materials	-41.65%	-46.76%	-68.28%	-148.13%	-8.45%	-59.83%	110.92%
Financials	-146.87%	-173.95%	-142.55%	-138.62%	-37.23%	-191.94%	-113.12%
S&P	-11.67%	-23.69%	-23.38%	-26.34%	10.32%	-21.08%	32.48%

Total Net Income (Reported)
Sector	Q2 ’09	Q2 ’08	Q1 ’09	Q1 ’08
Technology	$2,150	$2,619	$1,462	$1,765
Cons. Disc,	$1,541	$1,234	$1,903	$1,609
Cons. Stap.	$1,527	$1,631	$1,452	$1,792
Materials	$443	$1,396	$725	$1,361
Industrials	$200	$455	$97	$393
Financials	-$86	$202	-$177	$239
S&P	$5,775	$7,537	$5,463	$7,159

Total Net Income Growth (Not Reported)
Sector	Q4 ’08 A	Q1 ’09 A	Q2 ’09 E	Q3 ’09 E	2008 A	2009 E	2010 E
Cons. Stap.	1.82%	-5.13%	1.17%	-7.80%	15.53%	-1.17%	10.37%
Health Care	8.22%	0.52%	-4.59%	-4.38%	12.52%	-3.04%	9.87%
Utilities	-0.63%	-1.45%	-7.66%	0.73%	1.79%	-1.85%	8.79%
Telecom	-17.12%	-18.99%	-26.10%	-15.97%	-5.21%	-19.75%	6.86%
Technology	-19.45%	-27.68%	-31.12%	-24.81%	19.47%	-18.29%	20.00%
Financials	-1019.60%	6.64%	-34.58%	289.87%	-107.06%	-614.87%	56.96%
Industrials	-20.29%	-34.83%	-40.81%	-33.50%	1.00%	-31.24%	8.26%
Cons. Disc.	-102.93%	-50.82%	-42.64%	-8.06%	-31.71%	-7.66%	42.72%
Energy	-26.01%	-60.57%	-66.17%	-63.72%	21.87%	-57.99%	43.89%
Materials	-86.36%	-79.78%	-78.02%	-66.96%	-14.11%	-65.55%	90.74%
S&P	-60.22%	-27.31%	-35.33%	-22.75%	-19.00%	-13.22%	23.97%

Total Net Income Growth (Combined)
Sector	Q4 ’08 A	Q1 ’09 A	Q2 ’09 E	Q3 ’09 E	2008 A	2009 E	2010 E
Cons. Stap.	1.53%	-6.34%	0.54%	-7.58%	15.47%	-1.58%	10.33%
Health Care	8.22%	0.52%	-4.59%	-4.38%	12.52%	-3.04%	9.87%
Utilities	-0.63%	-1.45%	-7.66%	0.73%	1.79%	-1.85%	8.79%
Telecom	-17.12%	-18.99%	-26.10%	-15.97%	-5.21%	-19.75%	6.86%
Technology	-18.78%	-26.97%	-29.86%	-24.15%	20.08%	-17.94%	21.54%
Financials	-992.86%	4.20%	-35.52%	271.58%	-106.72%	-634.03%	58.28%
Cons. Disc.	-96.07%	-43.46%	-36.78%	-10.46%	-27.34%	-7.13%	39.15%
Industrials	-19.82%	-35.61%	-41.10%	-34.06%	0.54%	-31.59%	8.61%
Energy	-26.01%	-60.57%	-66.17%	-63.72%	21.87%	-57.99%	43.89%
Materials	-81.98%	-74.07%	-76.41%	-70.42%	-13.36%	-64.75%	93.97%
S&P	-58.59%	-27.17%	-34.87%	-22.88%	-18.09%	-13.55%	24.30%

Scorecard and Median EPS Growth:

Positive surprises leading disappointments by 7:1 margin
Median surprise is a very strong 6.84%%
Consumer Durables the clear leader on almost all fronts
Median EPS growth -2.9% so far

Second-Quarter Scorecard (Surprises)
Sector	% Reported	Median % Surprise	# Pos Surprise	# Neg Surprise	# Match
Cons. Disc.	12.35%	11.63%	10	0	0
Cons. Stap.	17.07%	2.44%	4	2	1
Tech	8.00%	1.16%	3	1	2
Industrial	1.72%	25.49%	1	0	0
Materials	7.14%	19.21%	2	0	0
Financial	1.25%	35.71%	1	0	0
S&P 500	5.40%	6.84%	21	3	3

Second-Quarter EPS Growth (Reported)
Sector	2Q ’09 (A)	3Q ’09 (E)	2008 (A)	2009 (E)	2010 (E)
Cons. Disc.	20.54%	7.52%	-0.97%	5.42%	10.38%
Cons. Stap.	-2.94%	5.21%	11.11%	4.33%	9.23%
Tech	-29.51%	-26.39%	9.52%	-19.82%	12.62%
Industrial	-55.86%	-67.48%	-35.33%	-24.14%	31.12%
Materials	-75.21%	-4.95%	12.70%	-86.55%	-69.08%
Financial	-142.60%	-116.20%	-37.71%	-192.60%	-113.10%
S&P 500	-2.94%	0.00%	5.31%	2.79%	9.39%

The Zacks Revisions Ratio: 2009

Revisions ratio for full S&P 500 down to 0.96, from 1.04
Reverses steady climb in the ratio for over 3 months
Three sectors in positive territory: Consumer sectors and Tech lead
Now into neutral territory for the S&P 500 as a whole
Industrials and Utilities continue to see estimates cut
Ratio of firms with rising to falling mean estimates falls to 0.90 from 0.94
Total number of revisions (4-week total) up to 1,567 from 1,472 (6.5%)
Increases down to 766 from 751 (2.0%); cuts up to 801 from 721 (11.1%)
Total Revisions activity past the low for the quarter

Like the “green shoots” of the economy, the trend towards more estimate increases relative to cuts has begun to wilt. This is the second straight week that the revisions ratio has fallen, reversing a 14-week sting of higher revisions ratios.

Granted a reading of 0.96 is far from a disaster, especially compared to the sub 0.20 readings we were seeing 6 months ago. Furthermore, it is happening on a seasonally low period of total revisions activity. Still, the positive change was one of the real hopeful signs in the estimate data, and has started to fade.

The number will become more significant in coming weeks as earnings season prompts a flood of estimate revisions. The direction those revisions take, on balance, will have a very significant influence on the direction the market takes.

Tech and Consumer Staples continue to have the strongest estimate revisions profiles.

The staples are lead by the food stocks like General Mills (GIS), ConAgra (CAG) and J.M. Smucker (SJM). While the changes in the mean estimates are not large for these names, there is a large preponderance of estimate increases over cuts. Given the tight consensus around such names, large changes in mean estimates are rare, but large numbers of increases or cuts are still significant.

The Tech sector is lead by Chip stocks like National Semiconductor (NSM) and Broadcom (BRCM).

The weakest sector is the Industrials, most notably the railroads like Norfolk Southern (NSC) and Union Pacific (UNP).

Sector	Avg. 4wk EPS Change (FY1)	Revisions Ratio	Firms With FY1 EPS Increase	Firms With FY1 EPS Decrease
Technology	0.57%	1.99	36	21
Consumer Staple	0.32%	1.93	25	10
Consumer Disc	-2.36%	1.20	26	42
Health Care	-0.21%	0.84	23	24
Energy	1.59%	0.84	20	20
Financial Services	-0.07%	0.81	35	41
Materials	-0.47%	0.79	10	12
Telecom	0.98%	0.67	4	4
Utilities	0.51%	0.46	10	19
Industrials	-1.92%	0.33	16	32
S&P 500	-0.38%	0.96	205	225

The Zacks Revisions Ratio: 2010

Revisions much stronger for 2010 than 2009
Revisions ratio down to 1.17 from 1.27
Tech and Staples showing best estimate momentum for 2010
Industrials and Utilities getting cut
Ratio of rising to falling mean estimates rises to 1.06 from 1.05
Total revisions activity past lows for the quarter
Total number of revisions rises to 1,262 from 1,199 (5.3%)

Estimate increases falls to 681 from 670 (1.5%); cuts fall to 581 from 529 (9.8%)

Sector	Avg. 4wk EPS Change (FY2)	Revisions Ratio	Firms With FY2 EPS Increase	Firms With FY2 EPS Decrease
Technology	1.80%	2.30	34	22
Consumer Staples	0.19%	2.04	25	11
Telecom	1.48%	1.71	3	4
Consumer Discr	-0.56%	1.46	32	33
Health Care	-0.01%	1.24	26	24
Financial Services	-1.11%	1.19	36	39
Energy	0.36%	0.81	23	17
Materials	-1.74%	0.68	10	14
Utilities	-0.44%	0.65	10	20
Industrials	-0.52%	0.52	20	22
S&P 500	-0.12%	1.17	219	206

Earnings Shares and P/Es

Health Care expected to take earnings crown from Energy in 2009 and keep it in 2010
Energy’s earnings share expected to plunge to 11.3% from 23.2%
Financials’ 2009 earnings share expected to rise to 11.4% from -2.0% in 2008.
The 12-month forward S&P P/E of 13.33 equates to earnings yield of 7.50%, which is attractive relative to 10-year T-note yield of 3.41%, but only mediocre relative to 6.37% A-rated 10-year corporate yield.
Health Care the lowest P/E sector for both 2009 and 2010
Earnings shares, including historical, based on current make up of S&P 500

Earnings Shares and P/Es
Sector	2008%	2009%	2010%	Market Cap %	P/E 2008	P/E 2009	P/E 2010
Technology	16.95%	15.92%	15.56%	18.95%	14.3	17.6	14.5
Health Care	16.13%	18.11%	16.01%	13.80%	10.9	11.3	10.3
Cons Staple	12.91%	14.71%	13.06%	13.55%	13.4	13.6	12.3
Financials	-2.01%	11.43%	14.55%	12.88%	nm	16.7	10.5
Energy	23.17%	11.27%	13.05%	11.76%	6.5	15.4	10.7
Industrials	13.53%	10.72%	9.36%	9.51%	9.0	13.1	12.1
Cons Disc.	6.80%	7.31%	8.18%	9.23%	17.3	18.7	13.4
Utilities	4.50%	5.11%	4.48%	3.96%	11.2	11.5	10.5
Telecom	4.23%	3.87%	3.33%	3.27%	9.9	12.5	11.7
Materials	3.79%	1.55%	2.41%	3.09%	10.4	29.6	15.3
S&P 500	100.00%	100.00%	100.00%	100.00%	12.8	14.8	11.9