ETN Eaton Corp New

Key Points:

• Third quarter reports starting to flood in. So far 126, or 25.2%, of S&P 500 reported. Total reported earnings growth of 12.1%. Ex-Financials, growth is 12.5% year over year. Total revenue growth 8.37%, 8.83% ex-Financials. Median earnings surprise 2.78% and median sales surprise 1.12%.
• For the vast majority (374) yet to report 12.3% growth expected, 12.0% ex-Financials. Down from growth of 17.3%, 18.0% ex-Financials growth in the second quarter. For Revenues, 6.23% expected and 10.00% ex-Financials.
• Second quarter earnings beats top misses by 2.65 ratio, sales beats top misses by 2.00 ratio, 65.1% of firms report earnings beats, 66.7% beat on revenues. Growing earnings firms outpaced declining earnings by 2.65 ratio, Revenues 3.67 growth ratio.
• Full-year total earnings for the S&P 500 jumps 46.0% in 2010, expected to rise 14.3% further in 2011. Growth to continue in 2012 with total net income expected to rise 11.9%. Financials major earnings driver in 2010. Excluding Financials, growth was 27.9% in 2010, and expected to be 17.8% in 2011 and 9.4% in 2012.
• Total revenues for the S&P 500 rise 7.89% in 2010, expected to be up 5.48% in 2011, and 5.52% in 2012. Excluding Financials, revenues up 9.28% in 2010, expected to rise 9.28% in 2011 and 5.71% in 2012.
• Annual Net Margins marching higher, from 5.88% in 2008 to 6.33% in 2009 to 8.57% for 2010, 9.28% expected for 2011 and 9.84% in 2012. Margin expansion major source of earnings growth. Net margins ex-Financials 7.79% in 2008, 6.99% in 2009, 8.18% for 2010, 8.82% expected in 2011 and 9.12% in 2012.
• Revisions ratio for full S&P 500 at 0.61 for 2011, at 0.36 for 2012 (both very bearish). Ratio of firms with rising to falling mean estimates at 0.54 for 2011, 0.36 (both also very bearish) for 2012. Total revisions activity past lows and rising fast.
• S&P 500 earned $543.4 billion in 2009, rising to $793.4 billion in 2010, expected to climb to $907.0 billion in 2011. In 2012, the 500 are collectively expected to earn $1.015 Trillion.
• S&P 500 earned $56.98 in 2009: $83.25 in 2010 and $95.10 in 2011 expected bottom up. For 2012, $106.43 expected. Puts P/E’s at 14.60x for 2010, and 12.78x for 2011 and 11.42x for 2012, very attractive relative to 10-year T-note rate of 2.19%. Top-down estimates: $96.66 for 2011 and $105.34 for 2012.

The Earnings Picture

Third quarter earnings results are pouring in.  So far I would characterize the season as good, but not great. We have 126, or 25.2%, of the S&P 500 firms reporting so far. That sort of understates things a bit, since those 25.2% of firms represent 39% of all expected earnings for the quarter (provided that the remaining 374 firms all report exactly in line with expectations).

The year-over-year growth rate for the S&P 500 is 12.13%. That is actually well above the 3.33% growth that those same 126 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 it 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.

If we exclude the financial sector, the year-over-year growth rate is just a bit higher at 13.51%, but it represents a far bigger slowdown from the second quarter, when growth was 22.71%. The remaining 374 stocks are expected to growth their earnings 12.33% over last year, down from 22.71% growth in the second quarter. If we exclude the financials, the remaining growth in the third quarter is expected to slow to 11.99% year over year from 17.99%. 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 12.25%.

Better than Expected

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 2.65 (for the 126) is actually well below the average experience of the last five years or so. The median surprise is 2.78% and that is also below normal. Still, it is far more positive surprises than disappointments.

Top-line surprises started off extremely strong, but faded over the last week. The surprise ratio is now 2.00 for revenues with a 1.12 median surprise. Not bad, but not terrific either. Top line growth so far has been 8.37%, and 8.83% ex-financials. The remaining 374 firms are collectively expected to grow their top lines by 7.20%, or by 10.28% if we exclude the financials.

Expanding net margins have been one of the keys to earnings growth. That is still the case, with reported net margins of 13.40% so far, up from 12.95% a year ago, and 12.27% in the second quarter (for those 126 firms). However, the mix of firms that have reported so far is skewed towards higher-margin firms, and the BAC effect is very big as far as the increase relative to the second quarter is concerned. Excluding financials, net margins have come in at 9.99% up from 9.58% a year ago, but down from 10.45% in the second quarter.

Looking ahead, overall net margins are expected to be down only slightly from the second quarter at 7.97% versus 8.00% in the second quarter, but up from 7.61% a year ago. Excluding the financials, though, it looks like the expanding net margin party might be coming to an end, with only 7.17% expected, down from both the 7.94% level of the second quarter, and 7.59% a year ago.

On an annual basis, net margins continue to march northward.  In 2008, overall net margins were just 5.88%, rising to 6.33% in 2009. They hit 8.57% in 2010 and are expected to continue climbing to 9.28% in 2011 and 9.84% 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 6.99% in 2009, but have started a robust recovery and rose to 8.18% in 2010. They are expected to rise to 8.82% in 2011 and 9.12% in 2012.

The expectations for the full year are very healthy, with total net income for 2010 rising to $793.6 billion in 2010, up from $543.4 billion in 2009.  In 2011, the total net income for the S&P 500 should be $907.0 billion, or increases of 46.0% and 14.3%, respectively. The expectation is for 2012 to have total net income passing the $1 Trillion mark to $1.015 Trillion, for growth of 11.9%.

S&P "EPS" to Surpass $100

That will also put the “EPS” for the S&P 500 over the $100 “per share” level for the first time at $106.43. That is up from $56.98 for 2009, $83.25 for 2010, and $95.10 for 2011. In an environment where the 10-year T-note is yielding 2.19%, a P/E of 14.6x based on 2010 and 12.8x based on 2011 earnings looks attractive. The P/E based on 2012 earnings is just 11.4x.

Estimate revisions activity is starting to rise again. 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 five positive surprises for every disappointment, one should expect more upwards revisions than cuts.

Even so, the ratio is still deep in negative territory at just 0.61, although that figure still includes a lot of 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 0.36, or almost three cuts for every increase.

The net cuts are very widespread. For this year only five of 16 sectors are seeing more positive than negative revisions, and eight sectors have more than two cuts for every increase. For next year, every single sector has more cuts than increases, and cuts out number increases by more than three to one in nine 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.

I would look for those companies with solid dividends and for which the analysts are still raising their estimates for next year, and which are rated either #1 or #2 on the Zacks Rank.  Some of the names that meet those criteria are DuPont (DD), Eaton (ETN) and PPG Industries (PPG).
 
Scorecard & Earnings Surprise

• Just 126 firms, or 25.2%, of the S&P 500 have reported third quarter results. Total growth at 12.13%. We have a 2.65 surprise ratio, and 2.78% median surprise, both slightly below normal. Positive surprises for 65.1% of all firms reporting.
• Positive year-over-year growth for 90, falling EPS for 34 firms, 2.65 ratio, 71.4% of all firms reporting have higher EPS than last year.
• Bigger firms have reported early, 39.0% 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
Aerospace	9.52%	11.11%	16.22	1	0	1	0
Industrial Products	15.53%	22.73%	7.26	5	0	4	1
Consumer Discretionary	7.88%	25.81%	6.16	5	2	7	1
Finance	8.88%	39.24%	4.92	19	9	20	10
Conglomerates	16.11%	33.33%	4.29	3	0	3	0
Auto	48.67%	28.57%	3.76	2	0	2	0
Business Service	27.93%	15.79%	2.86	3	0	3	0
Computer and Tech	17.59%	27.78%	2.80	12	5	12	8
Retail/Wholesale	8.93%	31.91%	2.70	9	3	12	2
Oils and Energy	35.36%	12.20%	2.17	3	2	4	1
Consumer Staples	13.01%	25.00%	1.98	6	3	6	3
Medical	2.84%	26.67%	1.59	9	2	8	4
Transportation	10.58%	44.44%	0.77	2	2	3	1
Construction	-30.00%	9.09%	0.00	0	0	0	1
Utilities	10.26%	2.50%	0.00	0	0	1	0
Basic Materials	17.25%	26.09%	-0.12	3	3	4	2
S&P 500	9.52%	25.20%	2.78	82	31	90	34

Sales Surprises

• Strong revenue growth of 8.37% among the 126 that have reported, median surprise 1.12 (strong), surprise ratio of 2.00. Positive surprise for 66.7%. Way down from last week.
• Growing revenues outnumber falling revenues by ratio of 3.67, 78.6% have higher sales than last year.
• The ratios and medians are likely to change significantly as more firms report.
• Pay close attention to the % reported column in assessing significance of sector data.

Sales Surprises 3Q Reported
Sales Surprises	Yr/Yr Growth	% Reported	Surprise Median	Sales Surp Pos	Sales Surp Neg	# Grow Pos	# Grow Neg
Basic Materials	17.43%	26.09%	4.206	5	1	6	0
Business Service	18.96%	15.79%	2.551	3	0	3	0
Transportation	16.08%	44.44%	1.72	4	0	4	0
Consumer Staples	19.29%	25.00%	1.719	7	2	6	3
Consumer Discretionary	11.97%	25.81%	1.563	6	2	7	1
Industrial Products	10.03%	22.73%	1.533	5	0	5	0
Medical	8.20%	26.67%	1.262	7	5	11	1
Construction	-0.61%	9.09%	1.165	1	0	0	1
Conglomerates	15.32%	33.33%	1.088	2	1	3	0
Retail/Wholesale	8.97%	31.91%	0.937	13	2	14	1
Computer and Tech	17.25%	27.78%	0.47	12	8	15	5
Finance	-4.05%	39.24%	0.335	16	15	17	14
Oils and Energy	33.42%	12.20%	-0.054	2	3	5	0
Utilities	-0.33%	2.50%	-0.438	0	1	0	1
Auto	11.91%	28.57%	-0.743	1	1	2	0
Aerospace	11.75%	11.11%	-6.503	0	1	1	0
S&P 500	8.37%	25.20%	1.117	84	42	99	27

Reported Quarterly Growth: Total Net Income

• The total net income for the 126 that have reported so far is 12.13% above what was reported in the third quarter of 2010, up sharply from 3.33% growth the same 126 firms reported in the second quarter. Excluding Financials, growth of 13.51%, down sharply from 22.71% reported in the second quarter.
• Sequential earnings rise 11.71% for the 126 that have reported, but fall 2.12% ex-Financials. A $12 billion sequential swing at BAC behind the difference.
• Growth expected to slow further in the fourth quarter, to 6.38%, 7.88% ex-Financials.
• Total net income reported (126 firms) $91.82 billion, vs. $81.89 billion year ago, and up from $82.19 billion in second quarter.
• Sample sizes now large enough to be significant for most sectors.

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
Auto	-43.92%	-2.04%	48.67%	144.72%	30.42%
Oils and Energy	-1.33%	11.24%	35.36%	22.53%	16.16%
Business Service	4.87%	-5.87%	27.93%	10.25%	20.24%
Computer and Tech	22.97%	-5.86%	17.59%	13.56%	34.59%
Basic Materials	-9.31%	-43.52%	17.25%	-21.29%	83.35%
Conglomerates	-1.23%	5.72%	16.11%	10.51%	12.05%
Industrial Products	-14.71%	0.96%	15.53%	11.28%	19.01%
Consumer Staples	-17.25%	0.90%	13.01%	4.48%	15.04%
Transportation	-2.89%	-0.46%	10.58%	12.41%	11.53%
Utilities	-6.11%	0.89%	10.26%	3.83%	-0.50%
Aerospace	8.80%	21.05%	9.52%	7.25%	-8.06%
Retail/Wholesale	-3.02%	6.52%	8.93%	6.23%	14.82%
Finance	-11.36%	71.45%	8.88%	2.27%	-38.57%
Consumer Discretionary	-41.91%	100.48%	7.88%	-1.94%	6.60%
Medical	-4.90%	-0.83%	2.84%	-1.15%	7.23%
Construction	59.40%	50.00%	-30.00%	4.61%	-65.00%
S&P 500	-0.79%	11.71%	12.13%	6.38%	3.33%
Excluding Financial	3.50%	-2.12%	13.51%	7.88%	22.71%

Expected Quarterly Growth: Total Net Income

• Total net income is expected (for the 374) to be 12.33% above what was reported in the third quarter of 2010, down from 17.28% growth in the second quarter. Excluding Financials, growth of 11.99%, down from 17.99% reported in the second quarter.
• Relative to the second quarter total net income to fall 4.51%, ex-Financials to fall 4.88%.
• Construction to lead the way (low base in 2010), followed by Energy and Materials.
• Four sectors see earnings accelerate from second quarter, 11 see slowing growth.
• Total expected net income of $143.82 billion versus $128.03 billion year ago, $150.6 billion in second quarter (374 firms). The 500 are to report $235.6 billion vs. $209.9 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
Construction	-24.94%	13.71%	64.56%	52.35%	-10.21%
Oils and Energy	-2.28%	-6.94%	49.80%	25.70%	42.34%
Basic Materials	-1.43%	-18.27%	30.56%	20.04%	36.68%
Industrial Products	-6.31%	-3.29%	19.11%	12.38%	27.66%
Business Services	9.26%	7.04%	16.42%	15.20%	13.69%
Finance	-1.00%	-0.82%	15.61%	10.71%	10.56%
Consumer Discretionary	23.06%	-6.38%	12.58%	12.23%	19.95%
Transportation	9.29%	0.68%	11.28%	16.22%	22.61%
Auto	-14.23%	-23.84%	8.49%	21.49%	14.42%
Conglomerates	14.00%	-4.72%	7.48%	-8.93%	21.07%
Retail/Wholesale	44.65%	-13.83%	3.48%	3.96%	9.00%
Medical	-2.51%	-5.38%	1.66%	4.80%	3.15%
Utilities	-37.77%	28.10%	1.62%	3.79%	7.63%
Aerospace	7.06%	-5.54%	0.86%	-1.25%	3.26%
Consumer Staples	2.57%	0.39%	-3.13%	-0.07%	9.77%
Computer and Tech	8.46%	-7.99%	-10.68%	-5.70%	8.56%
S&P 500	2.00%	-4.51%	12.33%	8.39%	17.28%
Excluding Financial	2.31%	-4.88%	11.99%	8.16%	17.99%

Quarterly Growth: Total Revenues Reported

• Revenue growth (for the 126 that have reported) strong at 8.37%, up from the 7.42% growth posted in the second quarter. Growth ex-Financials 8.83%, up from 7.42%.
• Sequentially revenues 2.27% higher than in the second quarter, up 2.39% ex-Financials.
• Eleven sectors reporting revenue growth over 10%, Finance, Construction and Utilities weak.
• Revenue growth expected to slow in fourth quarter falling to 2.31%, 2.36% 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	3.87%	7.63%	33.42%	26.85%	26.80%
Consumer Staples	-18.17%	1.90%	19.29%	-13.11%	17.65%
Business Service	1.29%	-0.86%	18.96%	6.47%	17.89%
Basic Materials	-6.00%	-6.79%	17.43%	6.48%	29.80%
Computer and Tech	13.05%	-0.69%	17.25%	13.11%	24.19%
Transportation	-1.10%	1.63%	16.08%	13.65%	16.07%
Conglomerates	5.34%	2.88%	15.32%	7.96%	8.07%
Consumer Discretionary	-1.48%	14.92%	11.97%	8.35%	12.30%
Auto	-10.78%	-0.13%	11.91%	8.24%	13.64%
Aerospace	23.45%	-4.87%	11.75%	5.53%	17.82%
Industrial Products	-2.27%	-0.08%	10.03%	7.49%	12.05%
Retail/Wholesale	-2.70%	6.86%	8.97%	6.43%	7.83%
Medical	2.55%	-0.95%	8.20%	4.93%	8.90%
Utilities	0.96%	-0.05%	-0.33%	1.33%	2.23%
Construction	11.59%	7.33%	-0.61%	6.40%	-6.14%
Finance	-4.64%	4.36%	-4.05%	-8.43%	-11.57%
S&P 500	-0.61%	2.27%	8.37%	2.31%	7.17%
Excluding Financial	-0.69%	2.39%	8.83%	2.36%	7.42%

Quarterly Growth: Total Revenues Expected

• Revenue growth for the 374 yet to report expected to fall to 7.20%, from the 12.48% growth posted in the second quarter. Growth ex-Financials 8.83%, up from 7.42% in 2nd quarter.
• Sequentially revenues 4.22% lower than in the second quarter, down 2.01% ex-Financials.
• Five sectors expecting revenue growth over 10%, Finance to see sharp 24.2% year-over-year drop in revenues.
• Revenue growth expected to slow sharply in fourth quarter falling to -0.14%, 1.45% 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
Oils and Energy	-15.78%	-8.22%	22.47%	-4.52%	28.50%
Industrial Products	0.48%	0.24%	15.85%	15.07%	20.32%
Consumer Discretionary	8.26%	-0.04%	14.38%	12.48%	15.67%
Basic Materials	5.29%	-8.93%	13.04%	10.09%	22.50%
Auto	5.48%	-7.86%	11.13%	7.56%	11.83%
Transportation	5.07%	0.88%	9.97%	10.16%	9.89%
Construction	-3.29%	4.52%	9.35%	11.51%	2.52%
Retail/Wholesale	1.14%	-0.38%	8.36%	-2.47%	7.21%
Utilities	-9.74%	13.11%	7.06%	4.14%	7.39%
Business Services	3.68%	1.40%	6.58%	5.85%	7.50%
Computer and Tech	3.13%	0.51%	5.36%	3.35%	9.22%
Medical	2.19%	-1.15%	4.61%	3.22%	4.76%
Conglomerates	8.14%	-1.51%	1.83%	-1.13%	1.17%
Consumer Staples	4.52%	-4.94%	0.98%	0.60%	7.99%
Aerospace	8.83%	4.73%	0.25%	4.77%	-1.94%
Finance	28.10%	-28.21%	-24.18%	-15.26%	10.49%
S&P 500	-0.09%	-4.22%	7.20%	-0.14%	12.48%
Excluding Financial	-1.99%	-2.01%	10.28%	1.45%	12.67%

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 126 that have reported rise to 13.40% from 12.95% a year ago, and up from 12.27% in the second quarter. Net margins ex-Financials fall to 7.01% from 7.02% a year ago and 7.64% in the second quarter.
• Net margins will swing significantly as more firms report and mix shifts.
• 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	23.54%	21.64%	22.82%	20.78%	23.44%	21.57%
Aerospace	16.39%	18.60%	14.62%	13.94%	16.13%	18.98%
Oils and Energy	15.87%	16.70%	16.16%	15.05%	16.43%	16.47%
Finance	14.82%	15.94%	9.70%	15.69%	13.27%	14.05%
Consumer Discretionary	8.38%	14.22%	8.15%	7.36%	9.26%	14.75%
Medical	13.16%	14.19%	14.17%	14.55%	13.97%	14.93%
Consumer Staples	13.29%	13.14%	13.27%	12.17%	11.05%	13.87%
Utilities	10.70%	11.51%	11.40%	10.91%	10.45%	10.40%
Conglomerates	8.45%	9.02%	8.77%	7.74%	8.26%	8.95%
Business Service	8.96%	8.65%	9.11%	8.19%	8.65%	8.05%
Transportation	8.37%	8.52%	8.70%	6.53%	8.46%	8.94%
Basic Materials	7.86%	8.14%	13.44%	14.27%	10.63%	8.16%
Industrial Products	7.08%	8.11%	8.03%	6.93%	6.84%	7.73%
Auto	4.67%	7.44%	7.58%	6.09%	2.07%	5.60%
Retail/Wholesale	3.40%	3.41%	3.42%	4.15%	3.41%	3.41%
Construction	3.66%	2.56%	1.83%	-1.97%	3.72%	3.64%
S&P 500	13.38%	13.40%	12.27%	13.19%	12.87%	12.95%
Excluding Financial	10.41%	9.99%	10.45%	9.40%	9.88%	9.58%

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 374 yet to report.
• Net margins expected to rise to 7.97% from 7.61% a year ago, but down from 8.00% in the second quarter. Net margins ex-Financials expected to fall to 7.17% from 7.55% a year ago and down from 7.94% in the second quarter.
• Nine 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
Business Service	14.16%	13.44%	12.73%	12.35%	13.01%	12.30%
Medical	12.11%	12.69%	13.26%	13.49%	11.92%	13.06%
Finance	9.23%	11.94%	8.64%	8.87%	7.06%	7.83%
Consumer Staples	10.17%	10.36%	9.81%	9.55%	10.24%	10.80%
Computer and Tech	10.77%	10.24%	11.18%	12.22%	11.80%	12.08%
Conglomerates	10.64%	10.09%	10.43%	9.31%	11.55%	9.56%
Consumer Discretionary	10.31%	9.07%	9.69%	9.68%	10.34%	9.22%
Industrial Products	7.95%	8.53%	8.84%	9.08%	8.14%	8.30%
Oils and Energy	9.89%	8.53%	8.41%	7.98%	7.52%	6.97%
Utilities	5.69%	8.26%	7.29%	7.23%	5.71%	8.70%
Transportation	8.47%	8.15%	8.16%	6.96%	8.03%	8.05%
Basic Materials	6.36%	6.80%	7.57%	7.83%	5.84%	5.89%
Aerospace	6.06%	6.16%	6.82%	6.09%	6.42%	6.12%
Auto	4.38%	5.38%	6.51%	6.68%	3.88%	5.51%
Construction	2.66%	3.43%	3.16%	1.27%	1.95%	2.28%
Retail/Wholesale	4.40%	3.07%	3.55%	3.21%	4.12%	3.22%
S&P 500	8.14%	7.97%	8.00%	7.86%	7.50%	7.61%
Excluding Financial	8.04%	7.71%	7.94%	7.76%	7.55%	7.59%

Annual Total Net Income Growth

• Following rise of just 2.0% in 2009, total earnings for the S&P 500 jumps 46.0% in 2010, 14.3% further expected in 2011. Growth ex-Financials 27.9% in 2010, 17.8% in 2011.
• For 2012, 11.9% growth expected. 9.4%, 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 eleven 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%	37.87%	6.03%
Basic Materials	-48.29%	61.86%	36.54%	12.53%
Industrial Products	-35.12%	36.60%	32.02%	17.53%
Consumer Discretionary	-15.01%	15.59%	28.16%	14.19%
Computer and Tech	-4.61%	46.67%	22.49%	10.95%
Business Service	1.46%	13.61%	17.93%	13.28%
Auto	-109.79%	1470.14%	17.39%	6.71%
Conglomerates	-23.61%	11.25%	11.64%	11.43%
Retail/Wholesale	2.62%	14.66%	11.19%	13.27%
Consumer Staples	5.36%	11.74%	8.85%	7.99%
Medical	2.53%	10.37%	6.52%	4.75%
Aerospace	-17.10%	21.38%	4.58%	11.70%
Utilities	-14.20%	-0.64%	3.50%	4.44%
Construction	-81.46%	623.88%	1.48%	46.44%
Finance	-138.22%	316.22%	-1.83%	26.02%
Transportation	-30.21%	81.24%	-5.34%	18.46%
S&P 500	2.03%	46.04%	14.30%	11.93%

Annual Total Revenue Growth

• Total S&P 500 Revenue in 2010 rises 8.57% above 2009 levels, a rebound from a 6.36% 2009 decline.
• Total revenues for the S&P 500 expected to rise 5.48% in 2011, 5.52% 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 and Finance expected to show positive top-line growth in 2011, but five 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 9.28% in 2010, 9.28% in 2011 and 5.71% in 2012.

Annual Total Revenue Growth
Sales Growth	2009	2010	2011	2012
Basic Materials	-16.96%	11.22%	18.64%	7.14%
Industrial Products	-20.96%	12.34%	18.12%	11.66%
Oils and Energy	-34.24%	23.74%	17.02%	0.13%
Auto	-21.40%	8.53%	14.80%	8.82%
Consumer Discretionary	-10.97%	3.87%	14.03%	8.27%
Computer and Tech	-3.19%	15.56%	13.27%	12.03%
Transportation	7.25%	10.70%	12.96%	9.56%
Business Service	-3.61%	4.81%	8.98%	6.97%
Retail/Wholesale	1.40%	4.08%	6.46%	6.60%
Medical	6.25%	11.45%	4.78%	2.84%
Construction	-15.92%	0.47%	4.63%	12.91%
Utilities	-6.24%	2.13%	4.47%	3.05%
Conglomerates	-13.30%	0.94%	4.36%	4.52%
Aerospace	6.51%	-0.34%	0.31%	6.02%
Consumer Staples	-0.52%	4.79%	-2.00%	5.47%
Finance	21.57%	0.11%	-17.77%	4.02%
S&P 500	-6.36%	7.89%	5.48%	5.52%
Excluding Financial	-10.56%	9.28%	9.28%	5.71%

Annual Net Margins

• Net Margins marching higher, from 5.88% in 2008 to 6.33% in 2009 to 8.57% for 2010, 9.28% expected for 2011. Trend expected to continue into 2012 with net margins of 9.84% expected. Major source of earnings growth.
• Financials significantly distort overall net margins. Net margins ex-Financials 7.78% in 2008, 6.99% in 2009, 8.18% for 2010, 8.82% expected in 2011. Expected to grow to 9.12% in 2012.
• Financials net margins soar from -8.42% in 2008 to 15.83% expected for 2012.
• All sectors but Medical and Utilities saw higher net margins in 2010 than in 2009. Fourteen 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	11.91%	15.12%	16.35%	16.20%
Medical	13.09%	12.96%	13.18%	13.42%
Finance	2.63%	10.95%	13.07%	15.83%
Business Service	10.07%	10.92%	11.82%	12.51%
Consumer Staples	9.75%	10.40%	11.55%	11.82%
Conglomerates	8.17%	9.00%	9.63%	10.27%
Consumer Discretionary	7.44%	8.28%	9.30%	9.81%
Oils and Energy	5.99%	7.29%	8.59%	9.10%
Industrial Products	6.08%	7.40%	8.27%	8.70%
Transportation	5.80%	9.50%	7.96%	8.61%
Basic Materials	4.72%	6.86%	7.90%	8.29%
Utilities	8.07%	7.85%	7.78%	7.88%
Aerospace	4.93%	6.00%	6.26%	6.59%
Auto	0.36%	5.23%	5.35%	5.24%
Retail/Wholesale	3.00%	3.31%	3.46%	3.67%
Construction	-0.51%	2.67%	2.59%	3.36%
S&P 500	6.33%	8.57%	9.28%	9.84%
Excluding Financial	6.99%	8.18%	8.82%	9.12%

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

• Revisions ratio for full S&P 500 at 0.61, up from 0.47 last week, still very bearish. Past seasonal low in activity, 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 five sectors with revisions ratio at or above 1.0. Eight sectors with two or more cuts per increase. Sample sizes growing adding to the significance of the ratios.
• Ratio of firms with rising to falling mean estimates at 0.54, up from 0.43 last week, still a very bearish reading.
• Total number of revisions (4-week total) climbing off of seasonal lows at 2,666, up from 2,113 last week (26.2%). Increases at 1,006 up from 671 (49.9%), cuts at 1,660, up from 1,442 (15.1%).

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	0.06	4	5	19	7	2.71	0.80
Consumer Discretionary	-0.18	14	11	76	56	1.36	1.27
Business Service	-0.04	7	11	33	26	1.27	0.64
Retail/Wholesale	-0.32	25	19	141	113	1.25	1.32
Auto	-0.41	2	5	21	20	1.05	0.40
Computer and Tech	-1.63	23	41	171	193	0.89	0.56
Medical	-0.46	23	20	110	135	0.81	1.15
Conglomerates	0.15	3	5	11	19	0.58	0.60
Industrial Products	-0.85	6	16	30	63	0.48	0.38
Finance	-2.69	22	54	195	441	0.44	0.41
Oils and Energy	-3.4	8	33	108	249	0.43	0.24
Utilities	-0.85	14	15	25	61	0.41	0.93
Transportation	0.4	1	7	18	61	0.30	0.14
Consumer Staples	-0.71	5	30	30	127	0.24	0.17
Basic Materials	-3.96	3	19	16	77	0.21	0.16
Construction	-1.39	1	7	2	12	0.17	0.14
S&P 500	-1.37	161	298	1006	1660	0.61	0.54

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

• Revisions ratio for full S&P 500 at 0.36, up from 0.32 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 have negative revisions ratio (below 1.0). Thirteen sectors with more than two cuts per increase. Seven sectors more than 4 to 1.
• Ratio of firms with rising estimate to falling mean estimates at 0.32, up from 0.31, still deep in bearish territory.
• Total number of revisions (4-week total) at 2,703, up from 2,094 last week (29.1%).
• Increases at 709 up from 505 last week (40.4%), cuts rise to 1,994 from 1,589 last week (25.5%).

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
Retail/Wholesale	-0.18	21	24	107	113	0.95	0.88
Consumer Discretionary	-0.69	9	19	55	80	0.69	0.47
Computer and Tech	-1.98	20	45	124	211	0.59	0.44
Medical	-0.80	16	29	87	181	0.48	0.55
Business Service	-0.84	3	15	18	38	0.47	0.20
Aerospace	-0.26	3	6	11	26	0.42	0.50
Auto	-1.79	2	5	9	23	0.39	0.40
Industrial Products	-2.21	5	17	23	75	0.31	0.29
Oils and Energy	-6.57	9	32	88	309	0.28	0.28
Construction	-4.66	1	8	3	13	0.23	0.13
Finance	-3.37	18	59	111	516	0.22	0.31
Consumer Staples	-1.31	6	28	29	137	0.21	0.21
Utilities	-1.21	7	20	16	76	0.21	0.35
Basic Materials	-4.76	3	19	17	84	0.20	0.16
Conglomerates	-1.41	1	7	4	40	0.10	0.14
Transportation	-1.49	0	9	7	72	0.10	0.00
S&P 500	-2.19	124	342	709	1994	0.36	0.36

Total Income and Share

• S&P 500 earned $543.4 billion in 2009, rising to earn $793.6 billion in 2010, $907.0 billion expected in 2011.
• The S&P 500 total earnings expected to hit the $1 Trillion mark in 2012 at $1.015 Trillion.
• Finance share of total earnings moves from 5.9% in 2009 to 18.0% in 2010, dip to 15.4% 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 14.0% in 2012.
• 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	$134,690	$164,977	$183,043	16.97%	18.19%	18.03%	18.74%
Finance	$142,515	$139,910	$176,319	17.96%	15.43%	17.37%	14.12%
Oils and Energy	$97,412	$134,301	$142,400	12.28%	14.81%	14.03%	11.64%
Medical	$100,818	$107,387	$112,490	12.70%	11.84%	11.08%	10.38%
Consumer Staples	$62,903	$68,471	$73,939	7.93%	7.55%	7.28%	9.15%
Retail/Wholesale	$58,300	$64,821	$73,421	7.35%	7.15%	7.23%	9.30%
Utilities	$47,911	$49,586	$51,787	6.04%	5.47%	5.10%	6.38%
Basic Materials	$23,781	$32,470	$36,539	3.00%	3.58%	3.60%	3.18%
Conglomerates	$28,602	$31,931	$35,582	3.60%	3.52%	3.50%	3.52%
Consumer Discretionary	$24,162	$30,967	$35,361	3.04%	3.41%	3.48%	3.95%
Industrial Products	$16,694	$22,039	$25,902	2.10%	2.43%	2.55%	2.45%
Business Service	$14,288	$16,850	$19,088	1.80%	1.86%	1.88%	2.43%
Aerospace	$13,874	$14,509	$16,206	1.75%	1.60%	1.60%	1.38%
Transportation	$14,604	$13,824	$16,376	1.84%	1.52%	1.61%	1.87%
Auto	$11,087	$13,015	$13,888	1.40%	1.43%	1.37%	1.02%
Construction	$1,932	$1,961	$2,871	0.24%	0.22%	0.28%	0.48%
S&P 500	$793,572	$907,019	$1,015,213	100.00%	100.00%	100.00%	100.00%

P/E Ratios

• Trading at 14.60x 2010, 12.78x 2011 earnings, or earnings yields of 6.85% and 7.82%, respectively. P/E for 2012 at 11.42x or earnings yield of 8.76%.
• Earnings Yields still very attractive relative to 10-year T-Note rate of 2.19%.
• Autos and Energy have lowest P/E based on 2011 and 2012 earnings. Aerospace and Finance also have single digit P/E’s for 2012.
• Construction has highest P/E for all three years by wide margin.
• S&P 500 earned $56.98 in 2009 rising to $83.25 in 2010. Currently expected to earn $95.10 in 2011 and $106.43 for 2012.

P/E Ratios
P/E	2009	2010	2011	2012
Auto	167.74	10.68	9.10	8.53
Oils and Energy	20.85	13.85	10.05	9.47
Aerospace	13.99	11.52	11.02	9.86
Medical	13.16	11.93	11.20	10.69
Basic Materials	25.11	15.51	11.36	10.10
Finance	47.79	11.48	11.70	9.28
Conglomerates	15.88	14.28	12.79	11.48
Industrial Products	23.23	17.01	12.88	10.96
Computer and Tech	23.65	16.13	13.17	11.87
Consumer Discretionary	21.87	18.92	14.76	12.93
Utilities	15.34	15.44	14.92	14.28
Consumer Staples	18.83	16.85	15.48	14.33
Transportation	26.90	14.84	15.68	13.23
Retail/Wholesale	21.20	18.49	16.63	14.68
Business Service	22.41	19.72	16.72	14.76
Construction	NM	29.02	28.59	19.53
S&P 500	21.33	14.60	12.78	11.42

Data in this report, unless stated otherwise, is through the close on Thursday 10/20/2011.

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 S&P which are based on the composition of the index at the time of the reports.
 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
DU PONT (EI) DE (DD): Free Stock Analysis Report
 
EATON CORP (ETN): Free Stock Analysis Report
 
PPG INDS INC (PPG): Free Stock Analysis Report
 
Zacks Investment Research