Bar Set Low for Q2 Earnings - Earnings Trends

Key Points:

Early reporters (May fiscal quarters) doing much better than expected
Second-quarter total net income expected to be down 36.8% year over year
Staples only sector expected to post positive growth in second quarter
Six sectors expected to decline more than 25%
Financials expected to rebound after disastrous 2008
Median EPS growth in second quarter expected to be -14.8%
Third-quarter expected to be down 22.3% year over year
Full year 2009 expected to fall 13.7%, which implies strong growth in fourth quarter
Bottom-up estimate for S&P 500 is now $59.60 in 2009 and is starting to rise.
S&P 500 now expected to earn $74.09 in 2010

Total Net Income Growth

Total net income for S&P 500 expect to fall 36.8% from a year ago
Early reporters down just 14.1%; Discretionary sector the only gainer.
Materials, Telecom, and Energy expected to tumble by 67% or more
Staples expected to lead by standing still (up 0.5%); Health Care to post just a 4.6% decline

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.	0.32%	17.64%	24.20%	-21.18%	0.81%	10.78%	18.54%
Cons. Stap.	0.30%	-18.72%	-7.01%	-5.99%	4.02%	3.65%	10.00%
Materials	113.28%	19.43%	-14.43%	-160.17%	82.00%	21.28%	0.95%
Technology	-8.36%	-17.13%	-17.90%	-15.10%	13.46%	-2.18%	39.32%
Industrials	2.92%	-75.32%	-56.03%	-66.63%	-13.37%	-50.94%	31.12%
Financials	-146.87%	-173.95%	-142.55%	-141.19%	-37.71%	-187.42%	-97.05%
S&P	-2.45%	-13.07%	-14.11%	-21.69%	6.66%	-3.91%	23.87%

Total Net Income (Reported)
Sector	Q2 ’09	Q2 ’08	Q1 ’09	Q1 ’08
Technology	$2,150	$2,619	$1,462	$1,765
Cons. Disc.	$1,453	$1,170	$1,819	$1,546
Cons. Stap.	$1,355	$1,457	$1,431	$1,761
Materials	$694	$811	$1,195	$1,000
Industrials	$200	$455	$97	$393
Financials	-$86	$202	-$177	$239
S&P	$5,766	$6,713	$5,828	$6,704

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.	1.65%	-5.17%	1.11%	-1.78%	15.46%	-1.13%	10.28%
Health Care	8.22%	0.52%	-4.64%	-4.37%	12.52%	-3.04%	9.81%
Utilities	-0.55%	-1.23%	-12.18%	0.70%	1.89%	-1.90%	8.63%
Financials	-1019.60%	6.64%	-12.38%	288.02%	-107.07%	-610.59%	58.26%
Industrial	-20.29%	-34.83%	-40.54%	-33.22%	1.00%	-31.06%	8.07%
Cons. Disc.	-102.50%	-50.43%	-42.02%	-7.80%	-31.56%	-7.38%	42.31%
Technology	-17.99%	-26.90%	-50.19%	-23.53%	18.48%	-17.80%	18.97%
Energy	-26.01%	-60.57%	-67.00%	-64.32%	21.87%	-58.44%	43.83%
Telecom	-18.08%	-18.86%	-69.89%	-15.82%	-5.68%	-19.42%	6.74%
Materials	-91.18%	-87.68%	-84.27%	-70.21%	-18.60%	-72.05%	130.78%
S&P	-60.38%	-27.71%	-37.64%	-22.37%	-19.10%	-13.68%	24.31%

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%	0.50%	-2.05%	15.47%	-1.55%	10.26%
Health Care	8.22%	0.52%	-4.64%	-4.37%	12.52%	-3.04%	9.81%
Utilities	-0.55%	-1.23%	-12.18%	0.70%	1.89%	-1.90%	8.63%
Financials	-992.86%	4.20%	-13.51%	269.69%	-106.73%	-629.80%	59.41%
Cons. Disc.	-96.07%	-43.46%	-36.57%	-10.24%	-27.34%	-6.93%	38.87%
Industrial	-19.82%	-35.61%	-40.84%	-33.80%	0.54%	-31.41%	8.42%
Technology	-17.42%	-26.25%	-47.16%	-22.97%	19.15%	-17.48%	20.55%
Energy	-26.01%	-60.57%	-67.00%	-64.32%	21.87%	-58.44%	43.83%
Telecom	-18.08%	-18.86%	-69.89%	-15.82%	-5.68%	-19.42%	6.74%
Materials	-81.98%	-74.07%	-77.59%	-69.94%	-13.36%	-64.71%	93.76%
S&P	-58.59%	-27.17%	-36.83%	-22.34%	-18.07%	-13.70%	24.29%

Scorecard and Median EPS Growth

The median surprise is high at 6.51%; six positive surprises per disappointment
Just 24 reports in; all May fiscal period ends
Consumer Discretionary off to a great start at 9-and-0 and15.4% median growth
Median EPS expected to fall by 14.8% in the quarter

Second-Quarter Scorecard (Surprises)
Sector	% Reported	Median % Surprise	# Pos Surprise	# Neg Surprise	# Match
Cons. Disc.	11.11%	11.76%	9	0	0
Healthcare	11.32%	1.22%	3	2	1
Materials	3.57%	6.84%	1	0	0
Tech	8.00%	1.16%	3	1	2
Industrial	1.72%	25.49%	1	0	0
Financial	1.25%	35.71%	1	0	0
S&P 500	4.80%	6.51%	18	3	3

Second-Quarter EPS Growth (Reported)
Sector	2Q ’09 (A)	3Q ’09 (E)	2008 (A)	2009 (E)	2010 (E)
Cons. Disc.	15.38%	8.20%	-3.05%	5.85%	10.27%
Healthcare	-4.88%	-1.84%	11.58%	3.67%	0.00%
Materials	-13.79%	133.33%	82.00%	21.28%	0.95%
Tech	-29.51%	-26.39%	9.52%	-19.82%	12.62%
Industrial	-55.86%	-67.48%	-35.33%	-24.14%	31.12%
Financial	-142.80%	-129.70%	-37.71%	-187.40%	-97.05%
S&P 500	-4.88%	-1.94%	7.63%	1.82%	10.05%

Second-Quarter EPS Growth (Not Reported)
Sector	2Q ’09 (E)	3Q ’09 (E)	2008 (A)	2009 (E)	2010 (E)
Healthcare	5.31%	5.36%	16.98%	12.55%	10.87%
Utilities	3.96%	0.00%	9.28%	3.79%	7.75%
Cons. Stap.	-0.94%	5.32%	12.66%	8.33%	9.67%
Telecom	-1.98%	-12.00%	25.40%	1.44%	7.38%
Tech	-16.67%	0.00%	19.13%	14.64%	13.44%
Cons. Disc.	-17.75%	-2.57%	11.81%	-11.37%	11.88%
Financial	-19.15%	9.64%	7.84%	-21.20%	8.22%
Industrial	-21.33%	-12.61%	16.92%	13.64%	9.87%
Materials	-34.31%	17.78%	12.20%	-4.89%	14.06%
Energy	-64.03%	-24.49%	12.35%	21.29%	16.09%
S&P 500	-14.76%	0.00%	13.80%	6.40%	10.76%

The Zacks Revisions Ratio: 2009

Revisions ratio for full S&P 500 down to 1.04 from 1.29
Reverses steady climb in the ratio for over 3 months
Three sectors in positive territory: Consumer Sectors, Tech lead
Six sectors in negative territory; Industrials the weakest
Now into neutral territory for the S&P 500 as a whole
Industrials, Materials continue to see estimates cut
Ratio of firms with rising to falling mean estimates declines to 0.94 from 1.04
Total number of revisions (4-week total) down to 1,472 from 1,653 (-10.9%)
Increases down to 751 from 930 (-19.2%), cuts down to 721 from 723 (-0.0%)
Total revisions activity approaching low for the quarter

The revisions ratio reversed course, falling after a long string of steady increases. The reversal brought it from the abysmal lows of 0.20 last winter (i.e. 5 cuts for every increase) to a high of 1.29 two weeks ago. Last winter, in individual sectors, the cuts were often in excess of 10:1.

The current reading is on a very low number of total revisions, which is quite normal for this time of the quarter. However, it is sort of like a stock that moves on low volume. It’s good if the stock moves up, but you have less conviction about its significance than if it is on high volume.

Tech has moved up substantially in the revisions ratio rankings in large part due to the strength in the Chip industry. Some of the real standouts in terms of large numbers of estimate increases leading to very large increases in mean estimates are National Semiconductor (NSM) and Texas Instruments (TXN).

The strength in Staples was lead by General Mills (GIS). However it is a sector where the estimate changes do not tend to be dramatic. Two other notables that had many more increases than cuts, but small changes in the mean estimate, were Colgate-Palmolive (CL) and Kroger (KR). The one firm in the sector that was noteworthy in heading south was Walgreens (WAG).

The weakness in the Industrial sector was most apparent in some of the transportation related companies, like FedEx (FDX) and Southwest Airline (LUV). Paccar (PCAR) was also very weak.

Sector	Avg. 4wk EPS Change (FY1)	Revisions Ratio	Firms With FY1 EPS Increase	Firms With FY1 EPS Decrease
Technology	0.88%	2.49	36	22
Consumer Staple	0.31%	2.15	25	8
Consumer Disc	-2.38%	1.52	30	33
Telecom	0.98%	1.17	4	4
Financial Services	-0.54%	0.87	33	40
Energy	0.94%	0.71	18	22
Materials	-0.45%	0.70	8	11
Health Care	-0.41%	0.65	21	25
Utilities	0.64%	0.50	12	17
Industrials	-1.79%	0.38	17	31
S&P 500	-0.46%	1.04	204	213

The Zacks Revisions Ratio: 2010

Revisions much stronger for 2010 than 2009
Revisions ratio down to 1.27 from 1.34
Tech showing best estimate momentum for 2010
Industrials and Utilities getting cut.
Ratio of rising to falling mean estimates rises to 1.05 from 1.30
Total revisions activity nearing lows for the quarter
Total number of revisions falls to 1,199 from 1,350 (-11.2%)
Estimate increases falls to 670 from 774 (-13.4%), cuts fall to 529 from 576 (-8.2%).

Chips lead the tech sector. Sprint (S) was the standout in the Telecom sector.

Sector	Avg. 4wk EPS Change (FY2)	Revisions Ratio	Firms With FY2 EPS Increase	Firms With FY2 EPS Decrease
Technology	1.14%	3.07	32	26
Telecom	1.41%	2.25	3	4
Consumer Staples	0.11%	1.89	21	13
Consumer Discr	-0.56%	1.54	30	30
Financial Services	2.50%	1.27	41	31
Health Care	-0.16%	0.96	24	25
Materials	-0.68%	0.81	10	11
Energy	0.65%	0.81	22	18
Industrials	-0.35%	0.70	18	24
Utilities	-0.40%	0.61	10	19
S&P 500	0.44%	1.27	211	201

Earnings Shares and P/Es

Earnings Shares, including historical, based on current make up of S&P 500
Health Care expected to take earnings crown from Energy in 2009 and keep it in 2010
Energy’s earnings share expected to plunge to 11.2% from 23.2%
Financials’ 2009 earnings share expected to rise to 11.4% from -2.0% in 2008.
12-month forward S&P P/E of 13.61 equates to earnings yield of 7.35% and is attractive relative to the 10-year T-note yield of 3.50%, but only mediocre relative to the 6.32% A-rated 10 year corporate.
Materials index weight is 2x its earnings share for 2009. Health care index weight well below its earnings share for both 2009 and 2010.

Earnings Shares and P/Es
Sector	2008%	2009%	2010%	Market Cap %	P/E 2008	P/E 2009	P/E 2010
Technology	16.95%	15.93%	15.58%	18.95%	14.5	17.9	14.8
Health Care	16.13%	18.14%	16.03%	13.63%	11.0	11.3	10.3
Cons Staple	12.91%	14.74%	13.08%	13.47%	13.6	13.8	12.5
Financials	-2.01%	11.36%	14.56%	12.95%	nm	17.2	10.8
Energy	23.17%	11.17%	12.93%	11.73%	6.6	15.8	11.0
Industrials	13.53%	10.76%	9.39%	9.64%	9.3	13.5	12.5
Cons Disc.	6.80%	7.34%	8.20%	9.17%	17.5	18.8	13.6
Utilities	4.50%	5.13%	4.48%	3.98%	11.5	11.7	10.8
Telecom	4.23%	3.88%	3.33%	3.38%	10.4	13.1	12.3
Materials	3.79%	1.55%	2.42%	3.10%	10.6	30.1	15.5
S&P 500	100.00%	100.00%	100.00%	100.00%	13.0	15.1	12.1