ALL Allstate Corporation

Key Points:

• The third quarter reports starting to flood in. So far 324, or 64.8%, of S&P 500 reports in. Total reported earnings growth of 17.58%. Ex-financials growth is 19.14% year over year. Total revenue growth 11.94%, 12.25% ex-financials. Median earnings surprise 2.82% and median sales surprise 0.68%.
• For the minority (176) yet to report, 6.65% growth expected, 7.36% ex-financials. Down from growth of 13.3%, 15.0% ex-financials growth in the second quarter. For revenues, 2.75% expected and 8.91% ex-financials.
• Second quarter earnings beats top misses by 3.12 ratio, sales beats top misses by 1.55 ratio, 66.0% of firms report earnings beats, 60.8% beat on revenues. Growing earnings firms outpaced declining earnings by 3.12 ratio, Revenues 4.23 growth ratio
• Full-year total earnings for the S&P 500 jumps 46.5% in 2010, expected to rise 14.1% further in 2011. Growth to continue in 2012 with total net income expected to rise 11.1%. Financials were the major earnings driver in 2010. Excluding financials, growth was 28.4% in 2010, and expected to be 17.3% in 2011 and 8.7% in 2012.
• Total revenues for the S&P 500 rise 7.90% in 2010, expected to be up 5.15% in 2011, and 5.55% in 2012. Excluding Financials, revenues up 9.29% in 2010, expected to rise 8.87% in 2011 and 5.76% in 2012.
• Annual Net Margins marching higher, from 5.88% in 2008 to 6.32% in 2009 to 8.58% for 2010, 9.31% expected for 2011 and 9.80% in 2012. Margin expansion major source of earnings growth. Net margins ex-financials 7.79% in 2008, 6.98% in 2009, 8.20% for 2010, 8.83% expected in 2011 and 9.07% in 2012.
• Revisions ratio for full S&P 500 at 0.77 for 2011, at 0.42 for 2012 (both bearish). Ratio of firms with rising to falling mean estimates at 0.72 for 2011, 0.38 (both also bearish) for 2012. Total revisions activity rising fast.
• S&P 500 earned $543.3 billion in 2009, rising to $796.0 billion in 2010, expected to climb to $908.2 billion in 2011. In 2012, the 500 are collectively expected to earn $1.009 Trillion.
• S&P 500 earned $57.09 in 2009: $83.63 in 2010 and $95.44 in 2011 expected bottom up. For 2012, $105.99 expected. Puts P/Es at 15.36 for 2010, and 13.46x for 2011 and 12.12x for 2012, very attractive relative to 10-year T-note rate of 2.39%. Top-down estimates: $96.84 for 2011 and $104.52 for 2012.

The Earnings Picture

Third quarter earnings results are pouring in. Total net income growth has been far higher than expected, although the median surprise and the ratio of positive surprises to disappointments has been about normal. Thus I would characterize the season as good, but not great.

We have 324, or 64.8%, of the S&P 500 firms reporting so far. That sort of understates things a bit, since those 64.8% of firms represent 75.7% of all expected earnings for the quarter. That is provided that the remaining 176 firms all report exactly in line with expectations.

The year-over-year growth rate for the S&P 500 (so far) is 17.58%. That is actually well above the 11.48% growth that those same 324 firms posted in the second quarter. However, the second quarter was distorted by some big hits to the financial sector, most notably Bank of America (BAC). This time BofA reported better-than-expected earnings and did not have the big “write off” it did in the second quarter. That resulted in a $12 billion swing in total net income between the second and third quarters.

With and Without the Financials

If we exclude the financials, the year-over-year growth rate is just a bit higher at 19.14%, but it represents a slowdown from the second quarter, when growth was 21.25%. The final growth tally for the quarter is likely to be lower than that.

The remaining 176 stocks are expected to growth their earnings 6.65% over last year, down from 13.28% growth in the second quarter. If we exclude the financials, the remaining growth in the third quarter is expected to slow to 7.36% year over year from 15.04%. Then again, at the beginning of earnings second quarter season, growth of 9.7% was expected; 12.2% ex-financials.

We will need another season where positive earnings surprises far outpace disappointments if we are going to match the second quarter growth rate. If we combine the already reported results with the expectations, it now looks like the final growth will come in at 14.73%. If the remaining firms surprise to the upside the way the ones that have already reported do, it is not hard to see the final growth coming in at around 16%.

Positive Surprises No Real Surprise

Relative to expectations, both earnings and revenues are doing better than expected. Then again, having far more companies report positive surprises than disappointments is entirely normal. The current ratio of 3.10 (for the 324) is in line with the average experience of the last five years or so. The median surprise is 2.82%, slightly below “normal.” Still, it is far more positive surprises than disappointments.

Top-line surprises started off extremely strong, but have faded. The surprise ratio is now 1.55 for revenues with a 0.68% median surprise. Not bad, but not terrific either. Top-line growth so far has been 11.94% and 12.25% ex-financials -- on both counts actually a slight acceleration from the second quarter. The remaining 176 firms are collectively expected to grow their top lines by 2.75%, or by 8.91% if we exclude the financials, both well below the second-quarter pace.

Expanding net margins have been one of the keys to earnings growth. That is still the case, with reported net margins of 10.74% so far, up from 10.23% a year ago, and 10.18% in the second quarter (for those 324 firms). However, the mix of firms that have reported so far is skewed towards higher-margin firms, and the BofA effect is very big as far as the increase relative to the second quarter is concerned.

Expectations for the Rest of the S&P 500

Excluding financials, net margins have come in at 9.37% up from 8.86% a year ago, but down from 9.42% in the second quarter. The remaining 176 firms are skewed towards much lower margin businesses such as Retail. The remaining 176 are expected to post net margins of 7.12%, up from 6.86% a year ago and 7.09% in the second quarter.

Excluding the financials, though, it looks like the expanding net margin party might be coming to an end, with 6.77% expected, down from both the 7.03% level of the second quarter and 6.87% a year ago.

On an annual basis, net margins continue to march northward. In 2008, overall net margins were just 5.88%, rising to 6.32% in 2009. They hit 8.58% in 2010 and are expected to continue climbing to 9.31% in 2011 and 9.80% 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 6.98% in 2009, but have started a robust recovery and rose to 8.20% in 2010. They are expected to rise to 8.83% in 2011 and 9.07% in 2012.

Focus on the Full Year

The expectations for the full year are very healthy, with total net income for 2010 rising to $796.0 billion in 2010, up from $543.3 billion in 2009. In 2011, the total net income for the S&P 500 should be $908.2 billion, or increases of 46.5% and 14.1%, respectively.

The expectation is for 2012 to have total net income passing the $1 Trillion mark to $1.009 Trillion, for growth of 11.1%. That will also put the “EPS” for the S&P 500 over the $100 “per share” level for the first time at $105.99. That is up from $57.09 for 2009, $83.63 for 2010 and $95.44 for 2011.

In an environment where the 10-year T-note is yielding 2.39%, a P/E of 15.4x based on 2010 and 13.5x based on 2011 earnings looks attractive. The P/E based on 2012 earnings is just 12.1x.

Heavy Estimate Revisions

Estimate revisions activity is rising rapidly, as is seasonally normal. We have seen a little bit of a bounce in the ratio of upwards to downwards revisions, especially for this year, but it is still far from turning positive. To some extent, there is a mechanical reason for upwards revisions to this year. After all, the third quarter is part of the full year, so if a company beats by, say, a nickel, and the analysts don’t increase their estimates for the firms by at least that much, they are implicitly cutting their numbers for the fourth quarter.

With more than three positive surprises for every disappointment, one should expect more upward revisions than cuts. Even so, the ratio is still deep in negative territory at just 0.77, although that figure still includes some estimate changes that were made before the earnings reports came in (we track a four week moving total). There is no mechanical effect when it comes to the revisions for next year, and those remain even further in negative territory at just 0.42, or more than two cuts for every increase.

The net cuts are very widespread. For this year, only six of 16 sectors are seeing more positive than negative revisions. For next year, every sector but Business Service has more cuts than increases, and cuts outnumber increases by more than two to one in 12 sectors.

As the principal argument in the bulls favor is the high level of corporate earnings, and the low valuations relative to them, this trend needs to reverse, and soon. The very low revisions ratio for 2012 is very troubling and is confirmed by the ratio of firms with rising mean estimates to falling mean estimates being just 0.38.

Scorecard & Earnings Surprise

• So far 324 firms, or 64.8% have reported third quarter results. Total growth at 17.58%. We have a 3.10 surprise ratio, and 2.82% median surprise, both about normal. Positive surprises for 66.0% of all firms reporting.
• Positive year-over-year growth for 243, falling EPS for 78 firms, 3.12 ratio, 75.0% of all firms reporting have higher EPS than last year.
• Bigger firms have reported early, 75.7% of all earnings in (provided remaining firms report exactly in line with expectations).
• Pay close attention to the % reported column in assessing the significance of sector level data.

Historically, a “normal earnings season” will have a surprise ratio of about 3:1 and a median surprise of about 3.0%. Thus in the early going we are doing much better than average on the median front, and about average on the ratio front. Early on the ratios and medians can be very volatile, but it looks like an OK start to things. Pay attention to the percent reporting in evaluating the significance of the sector numbers.

Scorecard & Earnings Surprise 3Q Reported
Income Surprises	Yr/Yr Growth	% Reported	Surprise Median	EPS Surp Pos	EPS Surp Neg	# Grow Pos	# Grow Neg
Oils and Energy	54.24%	51.22%	6.38	14	7	17	4
Consumer Discretionary	7.83%	64.52%	4.60	11	7	15	5
Auto	21.68%	100.00%	4.55	5	2	6	1
Aerospace	12.44%	100.00%	4.51	7	2	7	2
Business Service	21.26%	73.68%	4.24	13	0	14	0
Computer and Tech	13.51%	65.28%	3.70	31	8	30	17
Conglomerates	24.76%	77.78%	3.47	4	2	6	1
Industrial Products	25.51%	77.27%	3.23	12	5	13	4
Utilities	14.71%	37.50%	2.88	11	1	12	3
Retail/Wholesale	8.29%	44.68%	2.70	14	4	17	3
Finance	10.92%	73.42%	2.62	34	16	39	18
Medical	5.38%	75.56%	2.37	28	3	26	8
Transportation	13.24%	88.89%	1.58	5	2	7	1
Basic Materials	30.85%	82.61%	1.58	13	4	17	2
Construction	10.89%	54.55%	0.29	3	0	3	3
Consumer Staples	7.32%	55.56%	0.00	9	6	14	6
S&P 500	17.58%	64.80%	2.82	214	69	243	78

Sales Surprises

• Strong revenue growth of 11.94% among the 3.24 that have reported, median surprise 0.68 (strong), surprise ratio of 1.55. Positive surprise for 66.0%.
• Growing Revenues outnumber falling revenues by ratio of 4.23, 80.9% have higher sales than last year.
• The ratios and medians are likely to change as more firms report.
• Every sector by Energy, Materials, Aerospace and Utilities reporting more positive surprises than revenue disappointments.

Sales Surprises 3Q Reported
Sales Surprises	Yr/Yr Growth	% Reported	Surprise Median	Sales Surp Pos	Sales Surp Neg	# Grow Pos	# Grow Neg
Auto	17.60%	100.00%	1.732	6	1	7	0
Business Service	13.16%	73.68%	1.5745	11	3	13	1
Medical	6.79%	75.56%	1.2785	25	9	32	2
Transportation	13.40%	88.89%	1.185	6	2	8	0
Construction	5.83%	54.55%	1.094	4	2	4	2
Conglomerates	5.92%	77.78%	1.088	5	2	6	1
Industrial Products	18.70%	77.27%	1.081	13	4	17	0
Retail/Wholesale	11.19%	44.68%	1.074	18	3	20	1
Consumer Discretionary	9.49%	64.52%	0.898	13	7	17	3
Basic Materials	16.13%	82.61%	0.8875	10	10	19	1
Computer and Tech	14.53%	65.28%	0.556	29	18	36	11
Consumer Staples	13.16%	55.56%	0.458	12	8	15	5
Finance	1.89%	73.42%	0.251	31	27	32	26
Oils and Energy	29.18%	51.22%	-0.054	10	11	20	1
Aerospace	-1.04%	100.00%	-1.96	2	7	5	4
Utilities	1.68%	37.50%	-2.062	2	13	11	4
S&P 500	11.94%	64.80%	0.6825	197	127	262	62

Reported Quarterly Growth: Total Net Income

• The total net income for the 324 that have reported so far is 17.58% above what was reported in the third quarter of 2010, up sharply from 11.48% growth the same 324 firms reported in the second quarter. Excluding financials, growth of 19.14%, down slightly from 21.25% reported in the second quarter.
• Sequential earnings rise 6.92% for the 324 that have reported, but rise only 0.54% ex-financials. A $12 billion sequential swing at BAC behind the difference.
• Growth (for the 324 firms) expected to slow in the fourth quarter, to 7.35%, 7.90% ex-financials
• Total net income reported (324 firms) $182.5 billion vs. $155.2 billion year ago, and up from $170.6 billion in second quarter.
• Sample sizes now large enough to be significant for most sectors, Autos & Aerospace done.

Quarterly Growth: Total Net Income Reported
Income Growth	"Sequential Q4/Q3 E"	"Sequential Q3/Q2 A"	Year over Year 3Q 11 A	Year over Year 4Q 11 E	Year over Year 2Q 11 A
Oils and Energy	-8.03%	0.24%	54.24%	20.22%	39.97%
Basic Materials	-18.27%	-24.42%	30.85%	-1.12%	52.56%
Industrial Products	-11.71%	5.68%	25.51%	11.92%	28.84%
Conglomerates	-2.28%	9.57%	24.76%	12.18%	12.22%
Auto	-27.74%	-15.00%	21.68%	19.87%	15.57%
Business Service	16.50%	2.51%	21.26%	16.01%	17.11%
Utilities	-29.70%	12.24%	14.71%	1.02%	6.49%
Computer and Tech	16.00%	-4.80%	13.51%	7.72%	28.89%
Transportation	0.66%	1.86%	13.24%	14.16%	16.86%
Aerospace	-6.07%	5.60%	12.44%	-3.44%	3.07%
Finance	-7.15%	50.90%	10.92%	4.79%	-28.29%
Construction	-39.69%	42.28%	10.89%	16.12%	-23.60%
Retail/Wholesale	-5.96%	6.04%	8.29%	1.22%	13.60%
Consumer Discretionary	-16.42%	59.10%	7.83%	7.44%	4.13%
Consumer Staples	-11.15%	4.53%	7.32%	0.90%	11.77%
Medical	-6.00%	0.32%	5.38%	1.98%	6.55%
S&P 500	-4.89%	6.92%	17.58%	7.35%	11.48%
Excluding Financial	-4.40%	0.54%	19.14%	7.90%	21.25%

Expected Quarterly Growth: Total Net Income

• Total net income is expected (for the 176) to be 6.65% above what was reported in the third quarter of 2010, down from 13.28% growth in the second quarter. Excluding financials, growth of 7.36%, down from 15.04% reported in the second quarter. 
• Relative to the second quarter total net income to fall 6.11%, ex-financials to fall 5.55%.
• Construction to lead the way (low base in 2010), followed by Materials and Energy.
• Six sectors see earnings accelerate from second quarter, 10 see slowing growth.
• Total expected net income of $58.56 billion versus $154.91 billion year ago, $62.37 billion in second quarter (176 firms). The 500 to report $241.0 billion vs. $210.1 billion a year ago.

Quarterly Growth: Total Net Income Expected
Income Growth	Sequential Q4/Q3 E	Sequential Q3/Q2 E	Year over Year 3Q 11 E	Year over Year 4Q 11 E	Year over Year 2Q 11 A
Auto	na	na	na	na	na
Aerospace	na	na	na	na	na
Construction	-13.24%	5.11%	295.36%	87.49%	-2.65%
Basic Materials	16.00%	-9.17%	74.63%	4.84%	39.78%
Oils and Energy	-8.35%	-8.83%	63.84%	38.95%	45.08%
Industrial Products	-16.36%	-3.90%	23.46%	10.81%	20.18%
Consumer Discretionary	20.29%	-13.71%	15.02%	9.63%	26.87%
Transportation	0.00%	8.50%	7.37%	6.26%	5.56%
Business Services	-5.38%	1.43%	6.60%	10.09%	10.54%
Retail/Wholesale	54.90%	-17.13%	3.43%	3.47%	8.39%
Medical	-6.16%	-7.37%	1.59%	2.39%	-0.22%
Finance	-5.88%	-10.18%	1.48%	2.71%	1.91%
Utilities	-41.29%	45.55%	-1.12%	-0.50%	2.92%
Consumer Staples	2.89%	-8.91%	-6.33%	-2.42%	12.85%
Computer and Tech	6.21%	-8.42%	-9.14%	-7.70%	11.68%
Conglomerates	-4.84%	-2.63%	-9.15%	-73.48%	417.70%
S&P 500	3.47%	-6.11%	6.65%	1.87%	13.28%
Excluding Financial	4.69%	-5.55%	7.36%	1.77%	15.04%

Quarterly Growth: Total Revenues Reported

• Revenue growth (for the 324 that have reported) strong at 11.94%, up from the 11.55% growth posted in the second quarter. Growth ex-financials 12.25%, up from 11.76%.
• Revenue growth for S&P 500 firms far outpacing US nominal GDP growth.
• Sequentially revenues 1.28% higher than in the second quarter, up 1.17% ex-financials.
• Nine sectors reporting revenue growth over 10%; Aerospace, Finance and Utilities weak.
• Revenue growth expected to slow in fourth quarter falling to 5.05%, 5.63% ex-financials. Still a healthy level.

Quarterly Growth: Total Revenues Reported
Sales Growth	"Sequential Q4/Q3 E"	"Sequential Q3/Q2 A"	Year over Year 3Q 11 A	Year over Year 4Q 11 E	Year over Year 2Q 11 A
Oils and Energy	-3.77%	-2.23%	29.18%	13.94%	33.35%
Industrial Products	-1.24%	3.06%	18.70%	11.95%	18.76%
Auto	-1.95%	-1.97%	17.60%	7.05%	11.95%
Basic Materials	-3.89%	-4.08%	16.13%	8.97%	19.48%
Computer and Tech	10.39%	-0.35%	14.53%	8.24%	20.43%
Transportation	2.05%	0.96%	13.40%	12.01%	13.30%
Consumer Staples	-11.63%	2.21%	13.16%	-7.03%	13.03%
Business Service	1.97%	1.02%	13.16%	6.21%	12.28%
Retail/Wholesale	2.18%	4.70%	11.19%	9.11%	10.67%
Consumer Discretionary	2.63%	8.22%	9.49%	7.69%	9.44%
Medical	1.72%	-0.26%	6.79%	4.11%	6.90%
Conglomerates	8.06%	0.50%	5.92%	2.18%	2.60%
Construction	-6.62%	5.48%	5.83%	1.90%	-4.92%
Finance	-5.85%	5.42%	1.89%	-5.29%	-6.25%
Utilities	-4.25%	4.00%	1.68%	0.37%	3.46%
Aerospace	9.36%	3.26%	-1.04%	3.78%	-1.83%
S&P 500	-0.60%	1.28%	11.94%	5.05%	11.55%
Excluding Financial	-0.09%	1.17%	12.25%	5.63%	11.76%

Quarterly Growth: Total Revenues Expected

• Revenue growth for the 176 yet to report expected to fall to 2.75%, from the 10.11% growth posted in the second quarter. Growth ex-financials 8.91%, down from 10.11% in 2nd quarter.
• Sequentially revenues 6.53% lower than in the second quarter, down 1.89% ex-financials.
• Five sectors expecting revenue growth over 10%, Finance to see sharp 41.5% year-over-year drop in revenues.
• Revenue growth expected to slow sharply in fourth quarter falling to -2.34%, 1.38% ex-financials.

Quarterly Growth: Total Revenues Expected
Sales Growth	Sequential Q4/Q3 E	Sequential Q3/Q2 E	Year over Year 3Q 11 E	Year over Year 4Q 11 E	Year over Year 2Q 11 A
Auto	na	na	na	na	na
Aerospace	na	na	na	na	na
Oils and Energy	-4.74%	-12.60%	19.12%	7.92%	16.97%
Consumer Discretionary	8.53%	-0.97%	18.97%	15.18%	20.43%
Basic Materials	17.04%	-18.22%	12.65%	6.29%	43.09%
Construction	-0.82%	4.95%	12.15%	18.38%	7.71%
Industrial Products	-2.53%	-1.80%	10.66%	19.13%	18.44%
Utilities	-14.82%	17.50%	8.54%	3.26%	11.27%
Retail/Wholesale	-1.27%	-0.57%	7.40%	-6.10%	5.53%
Computer and Tech	1.93%	0.77%	6.03%	6.86%	9.78%
Business Services	2.55%	3.01%	5.44%	5.70%	5.82%
Medical	1.53%	-1.39%	5.17%	2.61%	3.41%
Conglomerates	-4.39%	-2.93%	4.68%	-5.68%	7.68%
Transportation	-0.23%	9.87%	4.14%	9.54%	4.22%
Consumer Staples	7.30%	-7.39%	0.40%	0.46%	8.11%
Finance	50.50%	-42.69%	-41.51%	-26.23%	9.61%
S&P 500	2.85%	-6.53%	2.75%	-2.34%	10.11%
Excluding Financial	-0.71%	-1.89%	8.91%	1.38%	10.18%

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 324 that have reported rise to 10.74% from 10.23% a year ago, and up from 10.18% in the second quarter. Net margins ex-financials rise to 9.37% from 8.86% a year ago and 9.42% in the second quarter.
• Final net margins will be lower as remaining firms are lower margin businesses.

Margin expansion 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	Q4 2011 Estimated	Q3 2011 Reported	Q2 2011 Reported	1Q 2011 Reported	4Q 2010 Reported	3Q 2010 Reported
Computer and Tech	20.80%	19.79%	20.72%	18.92%	20.90%	19.97%
Finance	14.01%	14.21%	9.92%	14.27%	12.66%	13.05%
Consumer Staples	13.35%	13.27%	12.98%	12.49%	12.30%	14.00%
Medical	11.69%	12.65%	12.58%	12.86%	11.94%	12.82%
Business Service	13.17%	11.53%	11.36%	11.01%	12.06%	10.76%
Consumer Discretionary	8.88%	10.90%	7.41%	7.47%	8.90%	11.07%
Conglomerates	9.75%	10.79%	9.89%	8.96%	8.88%	9.16%
Oils and Energy	8.99%	9.41%	9.18%	9.08%	8.52%	7.88%
Utilities	6.54%	8.91%	8.25%	7.92%	6.50%	7.90%
Transportation	8.48%	8.60%	8.52%	6.77%	8.32%	8.61%
Industrial Products	7.50%	8.39%	8.19%	8.03%	7.51%	7.94%
Basic Materials	7.11%	8.37%	10.62%	10.94%	7.84%	7.43%
Aerospace	6.04%	7.03%	6.88%	6.14%	6.49%	6.19%
Auto	4.21%	5.71%	6.59%	6.64%	3.76%	5.52%
Construction	2.98%	4.61%	3.42%	1.24%	2.61%	4.40%
Retail/Wholesale	3.04%	3.30%	3.26%	3.70%	3.27%	3.39%
S&P 500	10.28%	10.74%	10.18%	10.47%	10.06%	10.23%
Excluding Financial	8.99%	9.37%	9.42%	8.95%	8.77%	8.86%

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. The numbers on this table are only for the 176 yet to report.
• Late reporters have lower margins historically and projected than the already reported.
• Net margins expected to rise to 7.12% from 6.86% a year ago, and up from 7.09% in the second quarter. Net margins ex-financials expected to fall to 6.77% from 6.87% a year ago and down from 7.03% in the second quarter.
• Seven sectors see year-over-year margin expansion, seven expected to see contraction.
• Margin expansion 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	Q4 2011 Expected	Q3 2011 Expected	2Q 2011 Reported	1Q 2011 Reported	4Q 2010 Reported	3Q 2010 Reported
Auto	NA	NA	NA	NA	NA	NA
Aerospace	NA	NA	NA	NA	NA	NA
Medical	15.00%	16.24%	17.28%	17.50%	15.04%	16.81%
Business Service	11.16%	12.10%	12.29%	11.41%	10.72%	11.96%
Finance	7.39%	11.82%	7.54%	8.33%	5.31%	6.81%
Conglomerates	11.58%	11.63%	11.59%	8.47%	41.17%	13.40%
Industrial Products	8.49%	9.89%	10.10%	10.40%	9.12%	8.86%
Utilities	6.79%	9.85%	7.95%	8.03%	7.05%	10.82%
Consumer Discretionary	10.75%	9.70%	11.13%	10.79%	11.29%	10.03%
Computer and Tech	9.79%	9.40%	10.34%	11.97%	11.34%	10.96%
Oils and Energy	6.98%	7.26%	6.96%	5.84%	5.42%	5.28%
Consumer Staples	6.93%	7.23%	7.35%	6.70%	7.13%	7.75%
Transportation	5.95%	5.93%	6.01%	6.23%	6.13%	5.76%
Basic Materials	4.35%	4.39%	3.96%	4.41%	4.41%	2.83%
Retail/Wholesale	4.81%	3.07%	3.68%	3.23%	4.37%	3.18%
Construction	2.53%	2.89%	2.89%	1.10%	1.60%	0.82%
S&P 500	7.16%	7.12%	7.09%	7.00%	6.87%	6.86%
Excluding Financial	7.14%	6.77%	7.03%	6.84%	7.11%	6.87%

Annual Total Net Income Growth

• Following rise of just 1.9% in 2009, total earnings for the S&P 500 jumps 46.5% in 2010, 14.1% further expected in 2011. Growth ex-financials 28.4% in 2010, 17.3% in 2011.
• For 2012, 11.1% growth expected. 8.7% ex-financials.
• Fourteen sectors expected to see total net income rise in 2011 and all in 2012. Utilities only (small) decliner in 2010. Nine sectors expected to post double-digit growth in 2011 and nine in 2012. Only Utilities and Health Care expected to grow less than 5% in 2012.
• Cyclical/Commodity sectors expected to lead in earnings growth again in 2011 and into 2012. Materials and Energy expected to grow almost 40% 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
Oils and Energy	-54.95%	50.58%	37.28%	4.93%
Basic Materials	-48.29%	61.86%	36.17%	11.23%
Industrial Products	-35.12%	36.60%	31.94%	17.66%
Computer and Tech	-5.37%	47.30%	22.21%	9.50%
Consumer Discretionary	-15.01%	24.95%	18.66%	14.07%
Business Service	1.46%	13.61%	18.07%	13.44%
Auto	- to +	1470.14%	16.14%	6.31%
Conglomerates	-23.61%	11.25%	11.32%	11.02%
Retail/Wholesale	2.62%	14.66%	10.74%	12.82%
Consumer Staples	5.36%	11.74%	8.86%	8.05%
Medical	2.44%	10.24%	6.79%	4.72%
Aerospace	-17.10%	21.38%	6.56%	8.81%
Utilities	-14.20%	-0.64%	2.98%	3.93%
Construction	- to -	- to +	1.28%	45.88%
Finance	- to +	316.23%	-0.63%	24.12%
Transportation	-30.21%	81.24%	-4.99%	18.35%
S&P 500	1.86%	46.52%	14.10%	11.07%

Annual Total Revenue Growth

• Total S&P 500 Revenue in 2010 rises 8.58% above 2009 levels, a rebound from a 6.40% 2009 decline.
• Total revenues for the S&P 500 expected to rise 5.15% in 2011, 5.55% in 2012.
• Materials to lead revenue race in 2011. Six 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, but four sectors expected to show positive growth below 5%. All sectors see 2012 growth, but only Construction, Tech and Industrials seen in double digits.
• 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 9.29% in 2010, 8.87% in 2011 and 5.76% in 2012.

Annual Total Revenue Growth
Sales Growth	2009	2010	2011	2012
Basic Materials	-16.96%	11.22%	18.75%	7.08%
Industrial Products	-20.96%	12.34%	18.31%	11.20%
Auto	-21.40%	8.53%	14.67%	7.41%
Oils and Energy	-34.24%	23.74%	14.42%	0.97%
Consumer Discretionary	-10.97%	3.87%	14.05%	8.29%
Computer and Tech	-3.69%	15.59%	13.32%	12.04%
Transportation	7.25%	10.70%	13.18%	9.24%
Business Service	-3.61%	4.81%	9.01%	6.96%
Retail/Wholesale	1.40%	4.08%	6.46%	6.61%
Medical	6.23%	11.40%	4.81%	2.18%
Construction	-15.92%	0.47%	4.68%	12.77%
Conglomerates	-13.30%	0.94%	4.65%	4.30%
Utilities	-6.24%	2.13%	4.58%	2.98%
Aerospace	6.51%	-0.34%	-0.72%	6.50%
Consumer Staples	-0.52%	4.79%	-2.00%	5.38%
Finance	21.57%	0.11%	-17.63%	3.82%
S&P 500	-6.40%	7.90%	5.15%	5.55%
Excluding Financial	-10.56%	9.29%	8.87%	5.76%

Annual Net Margins

• Net margins marching higher, from 5.88% in 2008 to 6.32% in 2009 to 8.58% for 2010, 9.31% expected for 2011. Trend expected to continue into 2012 with net margins of 9.80% expected. Major source of earnings growth.
• Financials significantly distort overall net margins. Net margins ex-financials 7.78% in 2008, 6.98% in 2009, 8.20% for 2010, 8.83% expected in 2011. Expected to grow to 9.07% in 2012.
• Financials net margins soar from -8.42% in 2008 to 15.79% 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. Widespread margin expansion currently expected for 2012 as well with 14 sectors expected to post expansion in margins.
• Six sectors to boast double-digit net margins in 2012, up from just three in 2009.
• 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	11.80%	15.04%	16.22%	15.85%
Finance	2.63%	10.95%	13.21%	15.79%
Medical	13.06%	12.93%	13.17%	13.50%
Business Service	10.07%	10.92%	11.83%	12.54%
Consumer Staples	9.75%	10.40%	11.55%	11.84%
Conglomerates	8.17%	9.00%	9.58%	10.20%
Consumer Discretionary	7.44%	8.95%	9.31%	9.81%
Oils and Energy	5.99%	7.29%	8.75%	9.09%
Industrial Products	6.08%	7.40%	8.25%	8.73%
Transportation	5.80%	9.50%	7.98%	8.64%
Basic Materials	4.72%	6.86%	7.87%	8.17%
Utilities	8.07%	7.85%	7.73%	7.80%
Aerospace	4.93%	6.00%	6.44%	6.58%
Auto	0.36%	5.23%	5.30%	5.24%
Retail/Wholesale	3.00%	3.31%	3.44%	3.64%
Construction	-0.51%	2.67%	2.58%	3.34%
S&P 500	6.32%	8.58%	9.31%	9.80%
Excluding Financial	6.98%	8.20%	8.83%	9.07%

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

• Revisions ratio for full S&P 500 at 0.77, up from 0.61 last week, still bearish. Total revisions activity rising fast, change in revisions ratio driven more by new estimates being added, not old ones falling out (higher significance to changes in the revisions ratio).
• Just six sectors with revisions ratio at or above 1.0. Sample sizes growing adding to the significance of the ratios.
• Ratio of firms with rising to falling mean estimates at 0.72, up from 0.54 last week, still a very bearish reading.
• Total number of revisions (4-week total) climbing off of seasonal lows at 3,481, up from 2,666 last week (30.6%). Increases at 1,511 up from 1,006 (50.2%), cuts at 1,970, up from 1,660 (18.6%).

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
Aerospace	1.21	7	2	53	6	8.83	3.50
Business Service	0.41	11	7	71	25	2.84	1.57
Retail/Wholesale	-1.08	23	21	169	134	1.26	1.10
Conglomerates	0.29	4	4	36	29	1.24	1.00
Consumer Discretionary	0.35	17	10	95	77	1.23	1.70
Medical	-0.19	28	14	167	153	1.09	2.00
Auto	-0.63	3	4	31	31	1.00	0.75
Transportation	0.87	4	5	46	63	0.73	0.80
Construction	-2.62	2	7	12	17	0.71	0.29
Utilities	-0.72	19	16	68	100	0.68	1.19
Finance	-1.34	28	50	326	492	0.66	0.56
Computer and Tech	-2.26	25	39	180	283	0.64	0.64
Industrial Products	-1.83	4	16	41	75	0.55	0.25
Oils and Energy	-3.32	10	31	140	260	0.54	0.32
Basic Materials	-7.92	6	17	36	94	0.38	0.35
Consumer Staples	-0.71	6	29	40	131	0.31	0.21
S&P	-1.44	197	272	1511	1970	0.77	0.72

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

• Revisions ratio for full S&P 500 at 0.42, up from 0.36 from last week, deep in bearish territory, sample sizes growing and becoming more significant.
• While better than in recent weeks, the failure of the revisions ratio to rise more significantly as activity has picked up is a very worrisome sign.
• All sectors but Business Service have negative revisions ratio (below 1.0). Twelve sectors with more than two cuts per increase. Seven sectors more than 3 to 1.
• Ratio of firms with rising estimate to falling mean estimates at 0.42, up from 0.38, still deep in bearish territory.
• Total number of revisions (4-week total) at 3,452, up from 2,703 last week (27.7%).
• Increases at 1,028 up from 709 last week (45.0%), cuts rise to 2,424 from 1,994 last week (21.6%).

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
Business Service	-0.30	6	12	50	49	1.02	0.50
Retail/Wholesale	-2.17	20	25	131	154	0.85	0.80
Consumer Discretionary	-0.52	10	18	82	98	0.84	0.56
Medical	-0.97	15	28	122	223	0.55	0.54
Transportation	-1.06	1	8	31	69	0.45	0.13
Computer and Tech	-2.69	22	43	131	294	0.45	0.51
Oils and Energy	-6.33	9	32	125	330	0.38	0.28
Industrial Products	-2.81	4	17	31	88	0.35	0.24
Conglomerates	-1.81	1	7	16	46	0.35	0.14
Auto	-2.14	2	5	12	37	0.32	0.40
Finance	-3.62	17	60	178	585	0.30	0.28
Aerospace	-0.80	1	8	12	40	0.30	0.13
Construction	-5.80	1	9	7	24	0.29	0.11
Consumer Staples	-1.16	7	27	41	146	0.28	0.26
Utilities	-1.55	10	23	32	128	0.25	0.43
Basic Materials	-6.89	3	20	27	113	0.24	0.15
S&P	-2.65	129	342	1028	2424	0.42	0.38

Total Income and Share

• S&P 500 earned $543.3 billion in 2009, rising to earn $796.0 billion in 2010, $908.2 billion expected in 2011.
• The S&P 500 total earnings expected to hit the $1 Trillion mark in 2012 at $1.009 Trillion.
• Finance share of total earnings moves from 5.9% in 2009 to 17.9% in 2010, dip to 15.6% expected for 2011; rebound to 17.4% 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.
• Medical share of total earnings far exceeds market cap share (index weight), but earnings share expected to shrink from 17.3% in 2009 to 11.1% 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	$135,766	$165,922	$181,688	17.06%	18.27%	18.01%	18.78%
Finance	$142,516	$141,622	$175,786	17.90%	15.59%	17.43%	14.58%
Oils and Energy	$97,412	$133,729	$140,328	12.24%	14.72%	13.91%	11.81%
Medical	$100,184	$106,990	$112,044	12.59%	11.78%	11.11%	10.27%
Consumer Staples	$62,903	$68,474	$73,990	7.90%	7.54%	7.33%	8.79%
Retail/Wholesale	$58,300	$64,562	$72,840	7.32%	7.11%	7.22%	9.06%
Utilities	$47,911	$49,338	$51,275	6.02%	5.43%	5.08%	6.17%
Basic Materials	$23,781	$32,382	$36,020	2.99%	3.57%	3.57%	3.31%
Conglomerates	$28,602	$31,839	$35,349	3.59%	3.51%	3.50%	3.52%
Consumer Discretionary	$26,119	$30,993	$35,355	3.28%	3.41%	3.50%	3.97%
Industrial Products	$16,694	$22,025	$25,914	2.10%	2.43%	2.57%	2.55%
Business Service	$14,288	$16,870	$19,137	1.80%	1.86%	1.90%	2.42%
Aerospace	$13,874	$14,785	$16,088	1.74%	1.63%	1.59%	1.36%
Transportation	$14,604	$13,875	$16,422	1.83%	1.53%	1.63%	1.88%
Auto	$11,087	$12,876	$13,688	1.39%	1.42%	1.36%	1.03%
Construction	$1,932	$1,957	$2,855	0.24%	0.22%	0.28%	0.50%
S&P 500	$795,971	$908,239	$1,008,779	100.00%	100.00%	100.00%	100.00%

P/E Ratios

• Trading at 15.36x 2010, 13.46x 2011 earnings, or earnings yields of 6.51% and 7.43%, respectively. P/E for 2012 at 12.122x or earnings yield of 8.25%. P/Es significantly higher than a month ago, but still low relative to history and interest rates.
• Earnings Yields still attractive relative to 10-year T-Note rate of 2.39%.
• Autos only sector with single-digit P/E for both years. Energy, Aerospace and Finance also have low P/Es based on 2012 earnings.
• Construction has highest P/E for all three years by wide margin.
• S&P 500 earned $57.10 in 2009 rising to $83.63 in 2010. Currently expected to earn $95.44 in 2011 and $105.99 for 2012.

P/E Ratios
P/E	2009	2010	2011	2012
Auto	178.50	11.37	9.79	9.21
Oils and Energy	22.31	14.82	10.79	10.29
Aerospace	14.56	11.99	11.25	10.34
Medical	13.81	12.53	11.73	11.20
Basic Materials	27.53	17.01	12.49	11.23
Finance	52.04	12.50	12.58	10.14
Conglomerates	16.76	15.06	13.53	12.19
Computer and Tech	24.90	16.91	13.83	12.63
Industrial Products	25.51	18.68	14.16	12.03
Utilities	15.64	15.74	15.28	14.71
Consumer Discretionary	23.24	18.60	15.67	13.74
Consumer Staples	19.10	17.09	15.70	14.53
Transportation	28.53	15.74	16.57	14.00
Retail/Wholesale	21.78	19.00	17.16	15.21
Business Service	23.52	20.70	17.53	15.45
Construction	NM	31.90	31.50	21.59
S&P 500	22.50	15.36	13.46	12.12

Data in this report, unless stated otherwise, is through the close on Thursday 10/27/2011.

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 the S&P, which are based on the composition of the index at the time of the reports.
 
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