(AIG) Earning Season Still Going Strong – Earnings Trends

February 8th, 2010

Key Points:

• With 308, or 61.6% of reports in, earnings season is going very strong. Median surprise 6.09%. Positive surprises beat disappointments by 2.25 ratio
• Earnings of reported firms up 54.25% year over year, remaining firms expected to show 17,739.5% increase, or 356.8% excluding AIG (AIG)
• Big reported earnings growth driven by Financials moving from loss a year ago to profits now, but even excluding the financial sector earnings are up 9.5% year over year
• Sequentially reported earnings up 5.66%, but remaining firms expected to see 3.39% decline
• Strong 31.5% total net income growth expected for 2010, with 16.1% more expected for 2011, rebounding from -18.9% decline in 2008, -9.4% in 2009
• Rebounding earnings for Finance, Materials and Energy to lead 2010 charge
• Huge margin expansion in 4Q expected to continue in 2010 and 2011
• Total revenues expected to fall 9.4% in 2009, rise 6.1% in 2010, up 6.9% in 2011
• Revisions ratios fall to 1.74 for 2010 and 1.81 for 2011; total activity rising fast
• Autos, Retail and Tech revisions strong
• Firms up/firms down ratio at 1.65 for 2010, 1.34 for 2011
• S&P500 expected to earn $550.2 billion in 2009, $723.6 billion in 2010, $840.1 billion in 2011
• Bottom Up estimates: $59.06 for 2009, $77.90 for 2010, $90.09 for 2011
• Top Down estimates: $57.45 for 2009, $78.03 for 2010, $86.50 for 2011

Welcome to the new Earnings Trends. We have decided to start focusing our analysis of the S&P 500 based on Zacks’ own sector groupings rather than the S&P GICS sectors. There are 16 Zacks sectors and only 10 GICS sectors, so the new groupings will result in better granularity of the data. The old way simply grouped too many very different companies together. In addition, we for the first time are presenting top-line as well as bottom-line expectations and surprise information.

We use the convention of referring to the next full fiscal year to be completed as 2010, though not all firms are on December fiscal years. This can cause discontinuities in the data, particularly around this time of year. The data is based on FY1, not based on 2010, even though I may call it 2010 in the report.

Earnings Better Than Market Would Indicate

The Market has been focused more on the plight of the PIGS (Portugal, Ireland, Greece and Spain) than it has on earnings reports of late. By simply looking at how the market has behaved, you would have had no idea about just how strong this earnings season has been. With close to 2/3 (61.6%, or 308) the reports in, the year-over-year earnings growth has simply been fabulous, at 59.3%. Expectations for the remaining firms are much better than that.

All together, the 192 remaining-to-report firms are expected to show total net income that is 17,739.5%. No, I did not miss a decimal point there. However, it is distorted by a single firm, AIG (of which we are all shareholders).

If AIG and its massive year-ago losses are excluded, the growth rate falls to 356.8%. That is nothing to sneeze at, and it means that when all is said and done we will probably see total net income of the whole S&P 500 more than double last year’s levels. Of course, that says as much about just how disastrous the state of the economy, and thus corporate profits, were a year ago, as it says about things being good today.

However, even set against the expectations coming into the earnings season it has been an extremely good one. For every two earnings disappointments there have been nine positive surprises. Half of all the surprises (including the disappointments) have been more than 6.09%. Even on the top line, things are coming in both better than last year and better than expected. Total revenues are 5.24% higher than a year ago among the 308 firms that have already reported, and positive revenue surprises are beating revenue disappointments by a margin of 2.25:1.

Put another way, 64.9% of all firms have reported better-than-expected revenues. Overall, 56.2% of all firms have reported higher revenues than a year ago. In the third quarter, that figure was below 30%.

While the dramatic growth in earnings is largely due to turnarounds in a handful of very large firms moving from big losses a year ago to profits this year, that is not the full story. Most of those big turnarounds were in the Financial sector. In total, the 56 Financial companies that have reported so far have earned $11.9 billion this year, while those same firms lost a total of $18.5 billion a year ago.

However, even if we exclude the Financial sector, total earnings are up 9.5%. Companies reporting higher earnings than a year ago outnumber firms with falling earnings by a margin of more than 3:2. Earnings growth is dramatically higher than revenue growth, which means we are seeing a huge increase in net margins. That margin expansion is expected to continue, not only in 2010, but into 2011 as well.

Full-Year Earnings

Looking at full-year earnings, total net income is expected to be lower than that of 2008, but just by 9.4% — a much smaller decline than the 18.9% plunge in 2008. This year will be one of earnings recovery, with growth of 31.5% expected, but note that that will still leave earnings below 2007 levels.

While the data is still relatively thin for 2011, and thus should be taken with a grain of salt, further growth of 16.1% is expected for total earnings next year. As for the top line, after a 9.5% plunge in 2009, revenues are expected to grow by 6.1% in 2010, followed by 6.9% growth in 2011.

In general, corporate revenue growth should be highly correlated with nominal GDP growth (although the S&P 500 certainly does not make up all corporate revenue in the country, nor do all of the revenues come from in the U.S.). It looks like the analysts are collectively expecting a fairly strong economic recovery over the next two years.

Breakdown by Sector

In 2010, the percentage growth numbers will be not really meaningful for the Auto and Construction sectors. While the 2009 numbers will be positive, they are so close to break-even that big percentage gains in 2010 are not to really be taken seriously. Among the larger sectors, Materials and the Financials are expected to be the growth leaders for the year (Financials did the negative-to-positive thing in 2009).

Energy is also expected to see a large rebound in its total profits. Together, Finance and Energy will account for more than half of all the incremental earnings in both 2010 and 2011, even though together they account for only 25% of the total market capitalization of the index. However, in the absence of mark-to-market rules, the quality of the earnings in the Financials is suspect. Do you file their book values under fiction or non-fiction?

Cost-cutting has been the major force driving earnings and earnings surprises. However, the costs to one company are either the revenues of another company or someone’s paycheck, which is then spent to create revenues for firms.

The bottom-up data coming out of all these individual firms seems to confirm what we have been getting from the macro statistics from the government: the economy is growing due to increases in productivity. Higher GDP with fewer workers. With GDP growth of 5.7% in the fourth quarter, but a total of 310,00 jobs lost (after revisions, or 0.24% of total jobs as of 9/09) on a seasonally adjusted basis in the same quarter. This was reflected in the extremely high productivity growth number of over 6.0% in the quarter and 5.1% on a year-over-year basis.

Companies Get Lean & Mean

The cost cutting, including job cutting, that corporations have done over the last year has set them up for explosive earnings growth now that some revenue growth has returned. High productivity growth is the key over the long term for higher overall standards of living, but in the short term make job growth tougher. Fortunately, most of the leading indicators in the employment report, like the average work week and temporary workers, were positive.

The revisions ratios for both 2010 and 2011 are strong, and should give us confidence that those growth rates will actually be achieved, if not exceeded (although still early for 2011). Every sector but Utilities and Transportation has seen more estimates raised for 2010 than cut, and the revisions ratio for 2010 stands at an extremely strong 1.74. In other words, the positive earnings surprises are causing the analysts to raise their sights for the future.

Unlike the other three quarters of the year, there is no “mechanical” reason to raise estimates in response to a positive earnings surprise. The fourth quarter 2009 earnings are not part of the full year 2010 earnings, the way the third quarter 2009 earnings were part of full-year 2009 earnings. The raising of the sights extends into 2011, where the revisions ratio stands at 1.81%.

The upward estimate revisions are not just in a handful of firms, either. The ratio of firms with rising estimates for 2010 to falling mean estimates stands at 1.65 for 2010 and 1.34 for 2011. The S&P 500 is selling for 13.7x consensus expectations for 2010, or an earnings yield of 7.25%, or almost twice the yield on the 10-year Treasury note (3.58%). The S&P is selling for just 11.9x consensus expectations for 2011. Stocks look very attractive, at least relative to bonds at this point.

Scorecard & Earnings Surprise
•    More than 60% of reports in, off to very strong start
•    Earnings Surprise Ratio (#beat/#miss) at 4.40, very strong but below 3Q level
•    Growth in scorecard is only for those firms that have reported
•    Reported growth very strong, at 54.25% so far yr/yr, but that says more about a year ago than today; sequentially up 5.66%. Among reported firms, sequential decline in 1Q of 5.4% is expected
•    Median Earnings Surprise 6.09%, a very strong reading
•    Year-over-year Earnings Growth Ratio (# Positive Growth/# Negative Growth) at 1.66, a big improvement over recent quarters

In evaluating the data presented here, keep the percentage reported in mind. The move to the 16 Zacks sectors means that even when all reports are in, some of the sectors will still have relatively few firms in them. For firms with only a few reports in, the median surprise will be very volatile as new firms are added to the sample.

With 61.6% of the reports in, this has been a very strong earnings season so far (although one would not know that by looking at the market action). Yes, we had easy comps from a year ago, but 54.25% year-over-year growth is nothing to sneeze at.

While most of that eye-popping growth is due to a handful of firms, mostly in the Financials, even if the financials are excluded earnings growth is still 9.5%. The majority of firms are reporting higher earnings than a year ago. Earnings are coming in much better than expected, with 76.0% of all firms reporting coming in with better than expected earnings, only 16.9% disappointing.

While all sectors have seen more positive surprises than disappointments, Tech has put on an absolutely stunning performance. With 73.6% of its results in, there have been 48 positive surprises and not a single disappointment.

Autos have far fewer firms, but with 2/3 of its results in, it has a perfect record, and a stunning 82.15% median surprise. Conglomerates, Retail and Discretionary also having stellar seasons in terms of positive surprises relative to disappointments. Disappointments are concentrated in the Financials, as the sector is responsible for 31% of all firms falling short of expectations.

Scorecard & Earnings Surprise
Income Surprises	Yr/Yr Growth	% Reported	Surprise Median	EPS Surp Pos	EPS Surp Neg	# Grow Pos	# Grow Neg
Auto	- to +	66.67%	82.15	4	0	3	1
Construction	- to +	45.45%	26.35	5	1	4	1
Consumer Discretionary	10.32%	62.86%	14.78	20	1	14	8
Industrial Products	-19.19%	84.21%	11.39	11	4	8	8
Computer and Tech	63.25%	73.61%	10.38	48	0	38	15
Conglomerates	-5.09%	88.89%	9.94	8	0	4	4
Basic Materials	205.79%	73.91%	7.32	12	4	10	7
Retail/Wholesale	20.66%	32.56%	6.42	14	1	11	3
Finance	- to +	71.05%	4.20	35	16	38	16
Utilities	-0.10	38.10%	4.16	11	3	9	7
Consumer Staples	0.27	52.63%	3.85	15	5	16	4
Aerospace	0.16	90.00%	3.76	5	3	3	6
Medical	-0.01	60.87%	3.72	20	3	21	7
Oils and Energy	-0.32	55.00%	3.63	13	6	5	17
Business Service	0.12	50.00%	3.45	7	2	7	3
Transportation	-0.20	90.00%	2.74	6	3	1	8
S&P	54.23%	61.60%	6.09	234	52	192	116

Sales Surprises
•    Sales Surprise Ratio at 2.25, median surprise 1.72%
•    Total revenues rise by 5.24% year over year, rising revenue firms exceed falling revenue firms by 1.23 ratio
•    Rising total revenues mostly due to the Financials (some of which actually had negative revenues last year)
•    Six sectors seeing revenues down, three by double digits, so far
•    Tech leads in Revenue surprises, Medical and Energy also posting positive surprises

Total revenues of the 308 S&P 500 firms that have reported are up a very strong 5.24%. This is mostly due to a handful of Financial firms that actually reported negative revenues last year.

In distinct contrast to the third quarter, when less than one third of all firms reported rising year over year sales, this quarter rising revenue firms outnumber decliners by 1.23:1. The fact that earnings have risen far more than have revenues means that we are seeing an explosion in net margins (or more precisely, we are recovering from the collapse in net margins a year ago).

Sales Surprises
Sales Surprises	Yr/Yr Growth	% Reported	Surprise Median	Sales Surp Pos	Sales Surp Neg	# Grow Pos	# Grow Neg
Auto	15.89%	66.67%	13.71	3	1	3	1
Oils and Energy	2.18%	55.00%	5.44	17	5	9	13
Computer and Tech	10.83%	73.61%	2.88	47	7	38	16
Conglomerates	-7.06%	88.89%	2.52	6	2	2	6
Medical	10.03%	60.87%	2.40	23	5	26	2
Business Service	1.29%	50.00%	2.27	8	3	8	3
Basic Materials	-16.94%	73.91%	2.02	10	7	3	14
Industrial Products	-14.30%	84.21%	1.51	11	5	7	9
Consumer Staples	4.68%	52.63%	1.43	14	7	12	9
Construction	-16.44%	45.45%	0.92	3	3	1	5
Transportation	-7.91%	90.00%	0.80	6	3	1	8
Retail/Wholesale	6.17%	32.56%	0.68	11	4	10	5
Consumer Discretionary	-5.20%	62.86%	0.57	13	9	12	10
Finance	29.03%	71.05%	0.54	19	13	32	24
Aerospace	12.51%	90.00%	-0.78	4	5	5	4
Utilities	-1.71%	38.10%	-6.36	5	10	4	12
S&P	5.24%	61.60%	1.72	200	89	173	141

Expected Quarterly Growth: Total Net Income
• The massive growth of over 17,000% is distorted by a single company, AIG. Excluding AIG, the total growth for the other 192 firms left to report is a still high 356.8%
• The move from losses a year ago to profits this year in Finance and Autos responsible for most of the growth (even after excluding AIG)
• Positive remaining yr/yr growth expected for 5 sectors (not counting the negative-to-positives), negative for 7; Industrials, Transportation and Utilities to lag
• Earnings expected to fall 3.39% from 3Q levels; 1.41% sequential decline expected for 1Q
• The numbers in the table (and Revenue growth table) below only refer to those firms which have not reported yet. The numbers will shift as the sample size here falls and correspondingly increases among those that have reported

Quarterly Growth: Total Net Income
Income Growth	Sequential Q1/Q4 E	Sequential Q4/Q3 E	Year over Year 4Q 09 E	Year over Year 1Q 10 E	Year over Year 3Q 09 A
Conglomerates	na	Na	na	na	288.76%
Construction	50.51%	-35.20%	- to +	114.70%	-61.11%
Auto	20.00%	-69.75%	- to +	139.59%	-7.69%
Finance	23.43%	-28.09%	- to +	9243.61%	169.03%
Computer and Tech	9.55%	-3.31%	14.79%	20.51%	-8.43%
Retail/Wholesale	-29.08%	40.90%	12.10%	7.95%	3.83%
Oils and Energy	-5.65%	8.67%	9.55%	17.86%	-47.71%
Medical	7.83%	6.96%	9.01%	19.40%	5.28%
Consumer Staples	-0.47%	-18.22%	2.86%	12.98%	3.48%
Consumer Discretionary	6.55%	3.78%	-4.32%	29.62%	-2.77%
Basic Materials	-5.96%	-6.78%	-8.16%	42.78%	-17.46%
Aerospace	-5.80%	-4.12%	-11.50%	0.34%	7.14%
Business Service	-26.13%	10.82%	-12.70%	1.43%	-10.18%
Utilities	33.32%	-40.32%	-17.69%	-10.22%	-6.37%
Transportation	-6.50%	1.27%	-24.70%	-6.91%	1167.44%
Industrial Products	121.95%	-9.89%	-34.46%	-14.00%	-47.62%
S&P	-1.41%	-3.39%	17739.50%	28.66%	25.05%

Quarterly Growth: Total Revenues
•    S&P 500 Revenues (of unreported) expected to be up 2.1% year over year in 4Q
•    Sequential revenue growth of 3.15% expected for 4Q, down 5.70% expected in 1Q
•    Retail expected to take sequential revenue lead in 4Q, mostly due to seasonality. Medical and Energy also strong
•    Medical and Finance to post highest year-over-year revenue growth in 4Q (among remaining)
•    Only 6 sectors expected to post positive year-over-year revenue growth in 4Q, 9 negative

Keep in mind that these numbers only refer to those firms that have yet to report their 4Q results. As firms report, the sample of firms left to report will shrink, potentially causing big week-to-week changes in the expected (and historical) growth rates. However, these tables are useful to look at to see which way the reported growth rates are likely to head by the time earnings season is over.

Quarterly Growth: Total Revenues
Sales Growth	Sequential Q1/Q4 E	Sequential Q4/Q3 A	Year over Year 4Q 09 E	Year over Year 1Q 10 E	Year over Year 3Q 09 A
Conglomerates	na	na	na	na	11.51%
Medical	10.12%	13.04%	20.27%	26.75%	6.87%
Finance	-0.01%	-34.51%	18.32%	-4.98%	73.84%
Computer and Tech	0.26%	1.72%	5.39%	10.52%	-9.84%
Retail/Wholesale	-11.03%	14.02%	3.52%	3.76%	0.64%
Business Service	-20.68%	4.03%	1.22%	-14.37%	-2.30%
Aerospace	-5.28%	5.94%	0.33%	5.51%	3.25%
Consumer Discretionary	-9.98%	8.62%	-0.96%	4.49%	-0.99%
Auto	-5.34%	-5.78%	-1.01%	4.28%	-13.19%
Basic Materials	-2.84%	2.31%	-1.02%	12.71%	-10.87%
Utilities	5.19%	2.86%	-2.32%	16.73%	-13.30%
Oils and Energy	3.09%	10.90%	-8.28%	10.73%	-47.21%
Construction	-5.94%	2.20%	-9.40%	1.99%	-14.04%
Industrial Products	31.06%	-11.63%	-10.67%	-3.60%	-24.10%
Consumer Staples	-12.62%	-12.44%	-12.17%	-10.52%	-3.22%
Transportation	-9.25%	1.16%	-19.74%	4.27%	-33.74%
S&P	-5.70%	3.15%	2.14%	5.08%	-2.03%

Annual Total Net Income Growth
• Total S&P 500 Net Income in 2009 expected to be 9.4% below 2008 levels
• Total earnings for the S&P 500 expected to jump 31.5% in 2010, 16.1% further in 2011
• Data for 2011 is still thin, but improving each week, so take with a grain of salt. New estimates affect growth as much or more than revisions
• Four sectors to see positive growth for 2009, although Finance, Construction and Autos moving from a loss to a profit. Among the positive-to-positive growth rates, only Aerospace is more than 2%
• Autos, Construction, Finance, Basic Materials and Energy expected to be earnings growth leaders in 2010. Conglomerates only sector expected to see earnings decline in 2010
• Despite strong growth in both 2010 and 2011, Energy earnings in 2011 expected to be 19.3% below 2008 levels
• Early data suggests that all sectors are expected to see further growth in 2011; Autos, Construction to lead (low base). Seven sectors seeing 20%+ growth
• The annual growth numbers are for all 500 firms in the S&P 500, regardless if they have reported or not

Annual Total Net Income Growth
EPS Growth	2008	2009	2010	2011
Auto	+ to -	- to +	938.38%	54.28%
Construction	+ to -	- to +	264.53%	85.67%
Finance	+ to -	- to +	203.32%	32.42%
Basic Materials	-4.88%	-50.88%	63.99%	20.35%
Oils and Energy	70.03%	-56.13%	45.84%	26.07%
Computer and Tech	12.78%	-5.35%	31.23%	4.30%
Transportation	3.72%	-29.03%	16.34%	21.58%
Aerospace	25.23%	12.92%	14.10%	6.92%
Retail/Wholesale	1.26%	0.35%	13.10%	13.70%
Business Service	35.92%	0.14%	12.89%	19.44%
Consumer Staples	-6.11%	-0.04%	12.48%	9.80%
Industrial Products	6.39%	-37.30%	11.53%	26.78%
Consumer Discretionary	8.84%	-6.95%	10.12%	11.23%
Medical	9.33%	1.28%	9.00%	9.68%
Utilities	-0.96%	-13.51%	4.74%	7.34%
Conglomerates	-10.96%	-25.44%	-6.77%	19.81%
S&P	-18.93%	-9.40%	31.51%	16.11%

Annual Total Revenue Growth
• Total S&P 500 Revenue in 2009 expected to be 9.40% below 2008 levels
• Total revenues for the S&P 500 expected to rise 6.06% in 2010, 6.94% in 2011
• Only 4 sectors to post positive revenue growth in ‘09; all but Finance expected to be positive in 2010
• Aerospace, Medical and Financials lead 2009 revenue growth
• Energy, Autos, Materials and Construction see biggest revenue declines in 2009. Energy expected to see double-digit increases in 2010. Materials, Medical and Tech also to be strong
• Data for 2011 very thin, but improving

Annual Total Revenue Growth
Sales Growth	2008	2009	2010	2011
Oils and Energy	24.36%	-34.72%	17.49%	17.30%
Basic Materials	19.03%	-19.46%	8.80%	8.45%
Medical	7.77%	6.01%	8.64%	3.55%
Computer and Tech	7.55%	-5.25%	8.56%	8.49%
Industrial Products	10.13%	-19.68%	5.01%	8.55%
Consumer Staples	-4.00%	-10.85%	4.79%	4.23%
Transportation	-29.48%	-14.61%	4.63%	8.68%
Business Service	9.99%	-3.18%	4.37%	-3.65%
Retail/Wholesale	5.09%	1.26%	4.34%	4.89%
Utilities	5.49%	-4.50%	3.97%	2.42%
Consumer Discretionary	6.54%	-9.19%	2.94%	5.15%
Auto	-8.23%	-21.49%	2.74%	10.43%
Construction	-14.10%	-15.66%	1.60%	11.67%
Aerospace	2.26%	6.30%	1.52%	3.78%
Conglomerates	6.32%	-13.51%	1.00%	3.45%
Finance	-20.71%	4.65%	-1.38%	5.42%
S&P	4.45%	-9.40%	6.06%	6.94%

Revisions: Earnings
The Zacks Revisions Ratio: 2010
• Revisions ratio for full S&P 500 at 1.74, very strong, down from 1.78 last week
• Autos and Tech lead revisions ratios, but thin data for Autos
• Retail and Materials also strong
• Utilities and Transportation weakest sectors for 2010
• Ratio of firms with rising to falling mean estimates at 1.65 up from 1.42 last week
• Positive earnings surprises for 2009 leading to upward revisions for 2010
• Total number of revisions (4-week total) up to 4,038 from 2,977 last week (35.6%)
• Increases up to 2,564 from 1,908 (34.4%), cuts up to 1,472 from 1,069 (37.9%)
• Total Revisions activity rising dramatically, nearing seasonal peak

The Tech sector’s strength is being driven by some of the biggest and best-known of the Tech firms. Apple (AAPL), Applied Materials (AMAT), Intel (INTC), Microsoft (MSFT) and Texas Instruments (TXN) all have extremely strong revisions profiles for 2010. In the Auto sector, strength is being “driven” by Ford (F) and Cummins Engine (CUM). The weakness in the Utility sector is driven mostly by the Telephones, most notably AT&T (T) and Verizon (VZ).

The Zacks Revisions Ratio: 2010
Sector	%Ch Curr Fiscal Yr Est – 4 wks	# Firms Up	# Firms Down	# Ests Up	# Ests Down	Revisions Ratio	Firms up/down
Auto	14.68	4	2	43	8	5.38	2.00
Computer and Tech	6.23	52	14	545	109	5.00	3.71
Retail/Wholesale	2.34	30	10	287	86	3.34	3.00
Construction	8.44	7	3	52	25	2.08	2.33
Basic Materials	-0.93	19	4	123	66	1.86	4.75
Industrial Products	12.97	11	7	102	55	1.85	1.57
Oils and Energy	1.87	29	11	269	146	1.84	2.64
Medical	0.67	26	18	264	146	1.81	1.44
Business Service	-0.09	11	7	61	37	1.65	1.57
Consumer Discretionary	-1.52	22	11	162	99	1.64	2.00
Conglomerates	-5.16	5	3	36	23	1.57	1.67
Consumer Staples	1.99	21	14	103	76	1.36	1.50
Finance	0.54	34	39	374	342	1.09	0.87
Aerospace	-0.14	6	4	45	43	1.05	1.50
Transportation	-0.04	3	7	35	62	0.56	0.43
Utilities	-0.58	16	25	63	151	0.42	0.64
S&P	1.79	296	179	2564	1474	1.74	1.65

Revisions: Earnings
The Zacks Revisions Ratio: 2011
• Revisions ratio for full S&P 500 at 1.81, down from 1.85, very strong
• Data thinner for 2011 than 2010, but looks very positive
• For the next few months, estimate additions will have as much impact as estimate revisions
• Small Auto sector leads (no cuts at all) but sample very small; Tech and Retail lead among the major sectors
• Ratio of firms with rising estimate to falling mean estimates at 1.34, up from 1.31 last week
• Utilities very weak, with more than 2 cuts for every increase
• Total number of revisions (4-week total) at 2,304, up from 1,772 (30.0%)
• Increases up to 1,484 from 1,150 (29.0%) cuts rise to 820 from 620 (32.3%)

The strong Auto and Tech Firms for 2011 are largely the same ones highlighted for 2010 strength. The retail strength is lead by an eclectic mix of firms, including Amazon (AMZN), Bed Bath & Beyond (BBBY), Family Dollar (FDO) and Starbucks (SBUX).

The Zacks Revisions Ratio: 2011
Sector	%Ch Next Fiscal Yr Est – 4 wks	# Firms Up	# Firms Down	# Ests Up	# Ests Down	Revisions Ratio	Firms up/down
Auto	9.74	5	0	30	0	#DIV/0!	#DIV/0!
Computer and Tech	5.03	47	18	314	73	4.30	2.61
Retail/Wholesale	1.06	26	14	145	39	3.72	1.86
Industrial Products	3.86	11	7	70	21	3.33	1.57
Conglomerates	0.16	6	2	25	8	3.13	3.00
Business Service	-1.42	9	9	42	17	2.47	1.00
Basic Materials	4.12	16	7	75	32	2.34	2.29
Oils and Energy	4.18	31	9	161	80	2.01	3.44
Consumer Discretionary	-0.94	21	13	111	58	1.91	1.62
Consumer Staples	1.28	19	12	64	35	1.83	1.58
Medical	0.48	21	23	159	116	1.37	0.91
Construction	-1.47	4	7	13	13	1.00	0.57
Transportation	2.07	4	5	25	25	1.00	0.80
Finance	-1.11	30	44	182	190	0.96	0.68
Aerospace	-0.23	5	5	32	34	0.94	1.00
Utilities	-0.67	14	26	36	79	0.46	0.54
S&P	1.40	269	201	1484	820	1.81	1.34

Total Income and Share
• S&P500 expected to earn $550.2 billion in 2009, $723.6 billion in 2010, $840.1 billion in 2011
• Energy Share of total earnings expected to rise to 12.8% in 2010 from 11.3% in 2009, further rise to 13.7% in 2011. Will remain well short of 2008 share of 23.4%
• Finance share of total earnings moves from deficit in 2008 to 6.3% in 2009, 14.5% in 2010, 16.5% in 2011
• Medical share of total earnings far exceeds market-cap share (index weight), but earnings share expected to shrink from 17.4% in 2009 to 13.6% in 2011
• Two sectors, Financial and Energy, to account for 53.9% of all incremental earnings between 2009 and 2011. Together they account for just 25.0% of total Market Cap
• Together over the two years, Tech and Medical will account for 18.1% of all incremental earnings, but they account for 30.6% of total market cap
• Together Discretionary and Retail will contribute just 5.5% of incremental earnings from 2009 to 2011, but account for 14.4% of market cap. These two sectors to account for 12.1% of 2011 earnings

Total Income and Share
Sector	Total Net Income $ 2009	Total Net Income $ 2010	Total Net Income $ 2011	% Total S&P Earn 2009	% Total S&P Earn 2010	% Total S&P Earn 2011	% Total S&P Mkt Cap
Computer and Tech	$91,810.95	$120,480.43	$125,660.65	16.69%	16.65%	14.96%	18.28%
Finance	$34,474.11	$104,565.68	$138,462.61	6.27%	14.45%	16.48%	13.96%
Medical	$95,670.00	$104,282.09	$114,378.09	17.39%	14.41%	13.61%	12.31%
Oils and Energy	$62,362.26	$90,946.22	$114,655.25	11.33%	12.57%	13.65%	11.05%
Retail/Wholesale	$50,727.84	$57,371.81	$65,230.04	9.22%	7.93%	7.76%	8.50%
Consumer Staples	$47,432.37	$53,352.37	$58,580.66	8.62%	7.37%	6.97%	7.33%
Utilities	$48,462.43	$50,757.60	$54,483.12	8.81%	7.01%	6.49%	6.27%
Consumer Discretionary	$35,767.84	$39,387.62	$43,810.93	6.50%	5.44%	5.21%	5.90%
Conglomerates	$24,489.88	$22,830.90	$27,354.60	4.45%	3.16%	3.26%	3.70%
Basic Materials	$12,843.14	$21,061.55	$25,346.92	2.33%	2.91%	3.02%	3.08%
Aerospace	$13,330.99	$15,210.63	$16,263.04	2.42%	2.10%	1.94%	1.84%
Business Service	$11,749.51	$13,264.53	$15,842.50	2.14%	1.83%	1.89%	2.30%
Transportation	$9,918.91	$11,539.59	$14,029.86	1.80%	1.59%	1.67%	2.08%
Industrial Products	$10,150.38	$11,321.06	$14,352.53	1.84%	1.56%	1.71%	1.90%
Auto	$526.16	$5,463.57	$8,429.41	0.10%	0.76%	1.00%	0.88%
Construction	$480.34	$1,750.99	$3,251.13	0.09%	0.24%	0.39%	0.60%
S&P 500	$550,197.12	$723,586.67	$840,131.34	100.00%	100.00%	100.00%	100.00%

P/E Ratios
• S&P 500 trading at 18.0x 2009 earnings, or an earnings yield of 5.56%
• Trading at 13.7x 2010, 11.8x 2011 earnings, or earnings yields of 7.30% and 8.47%, respectively
• Earnings Yields extremely attractive relative to 10-year T-Note rate of 3.57%
• Medical has lowest P/E based on 2010 earnings, but Energy best looking out to 2011. Construction has highest P/E for 2010 and 2011
• Auto, Construction and Finance high 2009 P/Es to fall dramatically in 2010 and 2011
• S&P 500 expected to earn $59.06 in 2009, $77.60 in 2010 and $90.09 in 2011

P/E Ratios
P/E	2008	2009	2010	2011
Construction	NM	124.1	34.1	18.3
Transportation	14.7	20.8	17.9	14.7
Business Service	19.4	19.4	17.2	14.4
Industrial Products	11.6	18.5	16.6	13.1
Conglomerates	11.2	15.0	16.1	13.4
Auto	NM	166.4	16.0	10.4
Computer and Tech	18.6	19.7	15.0	14.4
Consumer Discretionary	15.2	16.3	14.8	13.3
Retail/Wholesale	16.6	16.6	14.6	12.9
Basic Materials	11.6	23.7	14.4	12.0
Consumer Staples	15.3	15.3	13.6	12.4
Finance	NM	40.1	13.2	10.0
Utilities	11.1	12.8	12.2	11.4
Oils and Energy	7.7	17.5	12.0	9.5
Aerospace	15.4	13.7	12.0	11.2
Medical	12.9	12.7	11.7	10.6
S&P 500	16.3	18.0	13.7	11.8

Data in this report, unless stated otherwise, is through the close on Thursday 2/4/2010.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

Zacks Investment Research

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