QQQQ Powershares Qqq Trust, Series 1 (MM)

Key Points:

• The third quarter reports almost done. So far 483 or 96.6% of S&P 500 reports in. Total reported earnings growth of 15.6%. Ex-Financials growth is 18.7% year over year. Total revenue growth 11.45%, 12.17% ex-Financials. Median earnings surprise 2.78% and median sales surprise 0.62%.
• For the few (17) yet to report, net income 14.4% lower than a year ago is expected. Down from a 3.72% decline in the second quarter. For revenues, 3.49% growth expected.
• Third quarter earnings beats top misses by 2.75 ratio; sales beats top misses by 1.43 ratio. 64.8% of firms report earnings beats; 58.6% beat on revenues. Growing earnings firms outpaced declining earnings by 2.87 ratio. Revenues 2.60 growth ratio.
• Year-over-year growth expected to slow to 5.54% in fourth quarter, 5.93% excluding Financials.  Down 3.87% sequentially, 4.53% decline expected ex-financials.
• Full-year total earnings for the S&P 500 jumps 46.2% in 2010, expected to rise 14.8% further in 2011. Growth to continue in 2012 with total net income expected to rise 10.2%. Financials the major earnings driver in 2010. Excluding Financials, growth was 28.0% in 2010, and expected to be 18.1% in 2011 and 7.9% in 2012.
• Total revenues for the S&P 500 rise 7.91% in 2010, expected to be up 5.77% in 2011 and 5.14% in 2012. Excluding Financials, revenues up 9.30% in 2010, expected to rise 9.59% in 2011 and 5.33% in 2012.
• Annual Net Margins marching higher, from 5.88% in 2008 to 6.32% in 2009 to 8.56% for 2010, 9.29% expected for 2011 and 9.74% in 2012. Margin expansion major source of earnings growth. Net margins ex-financials 7.79% in 2008, 6.98% in 2009, 8.17% for 2010, 8.80% expected in 2011, and 9.02% in 2012.
• Revisions ratio for full S&P 500 at 1.33 for 2011 (bullish), at 0.79 for 2012 (slightly bearish). Ratio of firms with rising to falling mean estimates at 1.19 for 2011 (neutral), 0.79 (slightly bearish) for 2012. Total revisions activity close to peak.
• S&P 500 earned $543.2 billion in 2009, rising to $792.8 billion in 2010, expected to climb to $910.3 billion in 2011. In 2012 the 500 are collectively expected to earn $1.004 Trillion.
• S&P 500 earned $56.88 in 2009: $83.18 in 2010 and $95.46 in 2011 expected, bottom up. For 2012, $104.95 expected. Puts P/Es at 14.62 for 2010, and 12.74x for 2011 and 11.55x for 2012 -- very attractive relative to 10-year T-note rate of 2.01%. Top-down estimates: $96.55 for 2011 and $103.16 for 2012.

The Earnings Picture

Third quarter earnings season is almost over. Total net income growth has been far higher than expected, although the median surprise and the ratio of positive surprises to disappointments is slightly below normal. Thus, I would characterize the season as very good, but we have seen better.

We have 483, or 96.6% of the S&P 500 firms reporting so far. The year-over-year growth rate for the S&P 500 (so far) is 15.60%. That is actually well above the 12.39% growth that those same 483 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 Financials, the year-over-year growth rate is higher at 18.73%, but it represents a slowdown from the second quarter, when growth was 20.30%.

The final growth tally for the quarter is likely to be slightly lower than that. The remaining 17 stocks are expected to actually post earnings 14.41% lower than last year, down from negative 3.72% growth in the second quarter. At the beginning of earnings second quarter season, growth of 9.7% was expected; 12.2% ex-Financials.

If we combine the already-reported results with the expectations, it now looks like the final growth will come in at 14.7%. 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 15%.

The bar for the remaining firms does seem to be set pretty low. While the percentage decline of the remaining firms looks bad, the likely impact on the total results is very low. The total net income of the 483 is $235.43 billion, while the total expected from the 17 is just $5.16 billion.

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 2.75 (for the 483) is marginally worse than the average experience of the last five years or so (around 3.00). The median surprise is 2.78%, slightly below “normal” (about 3.0%). Still, it is far more positive surprises than disappointments.

Top-line surprises started off extremely strong, but have faded. The surprise ratio is now 1.43 for revenues with a 0.62% median surprise. Not bad, but not terrific either. Top-line growth so far has been 11.45%, and 12.17% ex-financials, on both counts actually a slight acceleration from the second quarter. The remaining firms are collectively expected see their top lines rise by 3.49%, below the second quarter pace of 7.55%. All the Financial reports are in.

The Magic of Margins

Expanding net margins have been one of the keys to earnings growth. That is still the case, with reported net margins of 9.47% so far, up from 9.13% a year ago, and 9.22% in the second quarter (for those 483 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 8.56% up from 8.09% a year ago, down slightly from 8.57% in the second quarter. The remaining 17 firms are expected to post net margins of 5.94%, down from 7.18% a year ago and down 6.17% in the second quarter.

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 8.56% in 2010 and are expected to continue climbing to 9.29% in 2011 and 9.74% 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 8.17% in 2010. They are expected to rise to 8.80% in 2011 and 9.02% in 2012.

Total net income in 2010 rose to $792.8 billion in 2010, up from $542.5 billion in 2009. The expectations for the full year are very healthy. In 2011, the total net income for the S&P 500 should be $910.3 billion, or increases of 46.2% and 14.8%, respectively. The expectation is for 2012 to have total net income passing the $1 Trillion mark to $1.004 Trillion, for growth of 10.2%.

That will also put the “EPS” for the S&P 500 over the $100 “per share” level for the first time at $104.95. That is up from $56.88 for 2009, $83.18 for 2010, and $95.46 for 2011. In an environment where the 10-year T-note is yielding 2.01%, a P/E of 14.6x based on 2010 and 12.7x based on 2011 earnings looks attractive. The P/E based on 2012 earnings is just 11.6x.

Revisions “Should” be Stronger

Estimate revisions activity is nearing its seasonal peak. We have seen a little bit of a bounce in the ratio of upwards to downwards revisions, especially for this year. There are now more increases than cuts, with a 1.33 ratio, but by a margin that is just barely into bullish territory.

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 almost three positive surprises for every disappointment, one should expect more upwards revisions than cuts.

That suggests that on balance the guidance given in the earnings conference calls was negative. There is no mechanical effect when it comes to the revisions for next year, and those remain in negative territory at just 0.79. Still, that is better than last week, and last week was better than the week before.

For this year 12 of 16 sectors are seeing more positive than negative revisions. Slightly more firms (ratio of 1.19) have higher mean estimates than a month ago. For next year, only five sectors have more cuts than increases. 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 0.79, but up from 0.60 lat week. At times it seems like some sort of parallel universe version of “Annie” where the rain will fall tomorrow, but tomorrow is always a quarter away.

However, there are good macroeconomic reasons to think that earnings growth has to slow. Still, it seems to me that the bar is being set very low for the fourth quarter. The expected year-over-year growth rate for the fourth quarter is just 5.54%, or 5.93% if we exclude the Financials.

Scorecard & Earnings Surprise

• So far 483 firms, or 96.6% have reported third quarter results. Total growth at 15.6%. We have a 2.75 surprise ratio, and 2.78% median surprise, both somewhat below normal. Positive surprises for 64.8% of all firms reporting.
• Positive year-over-year growth for 356, falling EPS for 124 firms, a 2.87 ratio; 73.7% of all firms reporting have higher EPS than last year.
• Percent of firms reporting in line with total earnings, 97.9% of all earnings in (provided remaining firms report exactly in line with expectations).
• Every sector sees more positive than negative surprises. Nine sectors done.

Historically, a “normal earnings season” will have a surprise ratio of about 3:1 and a median surprise of about 3.0%. 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
Consumer Discretionary	13.20%	93.55%	4.91	18	8	24	5
Oils and Energy	60.06%	100.00%	4.81	26	15	34	7
Auto	21.68%	100.00%	4.55	5	2	6	1
Aerospace	12.44%	100.00%	4.51	7	2	7	2
Conglomerates	16.20%	88.89%	3.88	5	2	6	2
Computer and Tech	12.34%	97.22%	3.77	46	15	44	26
Industrial Products	25.46%	86.36%	3.23	14	5	15	4
Business Service	21.98%	94.74%	3.07	16	0	18	0
Utilities	8.69%	100.00%	2.82	26	9	26	14
Retail/Wholesale	7.83%	93.62%	2.70	30	6	35	8
Medical	7.10%	93.33%	2.56	33	4	34	8
Finance	1.06%	100.00%	2.44	44	25	51	27
Transportation	13.19%	100.00%	2.04	6	2	8	1
Basic Materials	35.29%	100.00%	1.58	15	5	21	2
Consumer Staples	7.48%	91.67%	1.25	17	11	21	12
Construction	60.64%	100.00%	0.00	5	3	6	5
S&P 500	15.60%	96.60%	2.78	313	114	356	124

Sales Surprises

• Strong revenue growth of 11.45% among the 483 that have reported, median surprise 0.62 (solid), surprise ratio of 1.43. Positive surprise for 58.6%. Energy leads with 3.73% median revenue surprise.
• Growing revenues outnumber falling revenues by ratio of 2.60; 72.3% have higher sales than last year.
• The ratios and medians are close to final numbers now.
• Every sector but Aerospace and Utilities reporting more positive surprises than revenue disappointments. Finance has more firms with falling than rising revenue.

Sales Surprises 3Q Reported
Sales Surprises	Yr/Yr Growth	% Reported	Surprise Median	Sales Surp Pos	Sales Surp Neg	# Grow Pos	# Grow Neg
Oils and Energy	32.05%	100.00%	3.728	26	15	36	5
Business Service	12.67%	94.74%	1.575	13	5	16	2
Medical	7.05%	93.33%	1.26	31	11	39	3
Industrial Products	18.03%	86.36%	1.081	14	5	15	4
Auto	17.60%	100.00%	1.067	5	2	6	1
Consumer Discretionary	15.06%	93.55%	1.038	19	10	23	6
Construction	8.47%	100.00%	1.023	7	4	6	5
Transportation	12.69%	100.00%	1.02	6	3	8	1
Basic Materials	19.20%	100.00%	0.959	13	11	20	4
Consumer Staples	11.17%	91.67%	0.876	21	12	20	13
Conglomerates	5.64%	88.89%	0.694	5	3	7	1
Retail/Wholesale	8.20%	93.62%	0.594	29	15	35	9
Computer and Tech	13.87%	97.22%	0.506	40	30	52	18
Finance	-0.43%	100.00%	0.45	42	35	39	40
Aerospace	-1.04%	100.00%	-1.96	1	8	7	2
Utilities	2.06%	100.00%	-2.17	11	29	20	20
S&P 500	11.45%	96.60%	0.621	283	198	349	134

Reported Quarterly Growth: Total Net Income

• The total net income for the 483 that have reported so far is 15.60% above what was reported in the third quarter of 2010, up from 12.39% growth the same 483 firms reported in the second quarter. Excluding Financials, growth of 18.73% is down slightly from 20.20% reported in the second quarter.
• Sequential earnings rise 3.48% for the 483 that have reported, but rise only 0.30% ex-Financials. A $12 billion sequential swing at BAC behind the difference.
• Growth (for the 483 firms) expected to slow in the fourth quarter, to 5.54%, 5.93% ex-Financials.
• Total net income reported (483 firms) $235.4 billion vs. $203.7 billion year ago, and up from $227.5 billion in second quarter.
• Nine sectors done, six more over 90% 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
Construction	-26.32%	16.42%	60.64%	42.88%	-13.36%
Oils and Energy	-9.46%	0.87%	60.06%	25.04%	41.07%
Basic Materials	-19.14%	-22.65%	35.29%	-5.74%	51.15%
Industrial Products	-15.08%	6.20%	25.46%	10.52%	27.41%
Business Service	6.84%	4.83%	21.98%	14.41%	17.44%
Auto	-33.24%	-15.00%	21.68%	10.74%	15.57%
Conglomerates	-1.32%	3.60%	16.20%	-9.95%	19.33%
Consumer Discretionary	-5.52%	15.73%	13.20%	5.31%	16.97%
Transportation	0.49%	2.14%	13.19%	13.88%	16.55%
Aerospace	-8.55%	5.60%	12.44%	-5.99%	3.07%
Computer and Tech	13.92%	-5.01%	12.34%	6.52%	27.43%
Utilities	-38.01%	26.15%	8.69%	-3.42%	5.14%
Retail/Wholesale	25.65%	-6.76%	7.83%	2.12%	10.15%
Consumer Staples	-10.88%	3.00%	7.48%	0.68%	12.62%
Medical	-9.39%	0.43%	7.10%	1.27%	4.96%
Finance	-0.28%	25.08%	1.06%	3.56%	-22.35%
S&P 500	-3.87%	3.48%	15.60%	5.54%	12.39%
Excluding Financial	-4.53%	0.30%	18.73%	5.93%	20.30%

Expected Quarterly Growth: Total Net Income

• Total net income is expected (for the 17 remaining) to be 14.41% below what was reported in the third quarter of 2010, down from -3.72% growth in the second quarter.
• Relative to the second quarter, total net income to fall 2.27%.
• Most sectors have only one or two firms left, nine sectors done.
• Total expected net income of $5.16 billion versus $6.03 billion year ago, $5.28 billion in second quarter (17 firms). The 500 to report $240.58 billion vs. $209.68 billion a year ago.
• Final year-over-year income growth should be 14.7%.

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
Basic Materials	na	na	Na	na	Na
Construction	na	na	Na	na	na
Conglomerates	na	na	Na	na	na
Aerospace	na	na	Na	na	na
Oils and Energy	na	na	Na	na	na
Finance	na	na	Na	na	na
Utilities	na	na	Na	na	na
Transportation	na	na	Na	na	na
Industrial Products	-14.05%	-10.55%	28.01%	6.70%	19.55%
Consumer Discretionary	131.12%	11.58%	-0.84%	73.80%	4.35%
Medical	5.12%	3.03%	-2.01%	-0.89%	-3.04%
Retail/Wholesale	124.26%	-32.48%	-3.68%	2.85%	7.28%
Consumer Staples	-3.83%	22.53%	-18.11%	-23.17%	-5.51%
Business Services	-0.87%	11.39%	-24.05%	-12.17%	-33.54%
Computer and Tech	-1.81%	-2.45%	-25.79%	-25.90%	-9.81%
S&P 500	6.37%	-2.27%	-14.41%	-15.08%	-3.72%

Quarterly Growth: Total Revenues Reported

• Revenue growth (for the 483 that have reported) strong at 11.45%, up from the 11.18% growth posted in the second quarter. Growth ex-Financials 12.17%, up from 11.52%.
• Revenue growth for S&P 500 firms far outpacing US nominal GDP growth.
• Sequentially revenues 0.76% higher than in the second quarter, up 0.37% ex-Financials.
• Nine sectors reporting revenue growth over 10% -- Aerospace, Finance and Utilities weak.
• Revenue growth expected to slow in fourth quarter falling to 2.28%, 2.19% ex-Financials.

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	-9.79%	-0.79%	32.05%	10.35%	28.47%
Basic Materials	-2.33%	-4.33%	19.20%	8.81%	24.28%
Industrial Products	-2.48%	3.33%	18.03%	11.23%	17.95%
Auto	-2.22%	-1.97%	17.60%	6.76%	11.95%
Consumer Discretionary	4.28%	4.23%	15.06%	11.72%	14.99%
Computer and Tech	8.26%	-0.16%	13.87%	9.13%	18.61%
Transportation	2.02%	0.98%	12.69%	11.66%	12.95%
Business Service	2.24%	1.39%	12.67%	6.79%	12.18%
Consumer Staples	-7.74%	0.34%	11.17%	-5.11%	11.40%
Construction	-2.51%	4.21%	8.47%	11.02%	2.15%
Retail/Wholesale	8.40%	1.02%	8.20%	6.95%	7.13%
Medical	1.36%	-0.03%	7.05%	3.96%	6.16%
Conglomerates	7.73%	0.39%	5.64%	2.02%	2.63%
Utilities	-4.48%	6.60%	2.06%	3.53%	6.28%
Finance	-17.11%	1.30%	-0.43%	-22.70%	-1.79%
Aerospace	7.99%	3.26%	-1.04%	2.49%	-1.83%
S&P 500	-1.87%	0.76%	11.45%	2.28%	11.18%
Excluding Financial	-1.69%	0.37%	12.17%	2.19%	11.52%

Quarterly Growth: Total Revenues Expected

• Revenue for the 17 yet to report expected to grow 3.49%, down from the 7.55% growth posted in the second quarter.
• Sequentially revenues 1.48% lower than in the second quarter.
• Remaining firms will drive down final growth numbers, but not enough of them to make a big difference.

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
Basic Materials	na	na	na	na	na
Construction	na	na	na	na	na
Conglomerates	na	na	na	na	na
Aerospace	na	na	na	na	na
Oils and Energy	na	na	na	na	na
Finance	na	na	na	na	na
Utilities	na	na	na	na	na
Transportation	na	na	na	na	na
Industrial Products	-19.93%	-2.64%	13.10%	5.06%	22.97%
Retail/Wholesale	8.99%	-2.78%	9.20%	7.87%	11.38%
Consumer Staples	-1.06%	6.97%	7.17%	5.66%	10.27%
Medical	0.38%	1.21%	4.10%	3.93%	5.91%
Consumer Discretionary	156.40%	22.39%	1.55%	-1.18%	-2.19%
Computer and Tech	-2.04%	3.12%	-3.24%	-2.30%	1.58%
Business Services	-1.09%	6.32%	-3.80%	-1.41%	-7.09%
S&P 500	-0.35%	1.46%	3.49%	2.68%	7.55%

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 483 that have reported rise to 9.47% from 9.13% a year ago, and up from 9.22% in the second quarter. Net margins ex-Financials rise to 8.56% from 8.09% a year ago and 8.57% in the second quarter.
• Final Net Margins will be lower as remaining firms are lower margin businesses (mostly Retail). However, they are not large enough to make a big difference.
• 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	18.12%	17.22%	18.10%	17.33%	18.57%	17.46%
Medical	12.06%	13.50%	13.43%	13.66%	12.38%	13.49%
Business Service	13.17%	12.60%	12.19%	11.65%	12.29%	11.64%
Consumer Staples	11.53%	11.94%	11.63%	10.95%	10.87%	12.35%
Finance	13.63%	11.33%	9.17%	12.54%	10.17%	11.16%
Consumer Discretionary	9.59%	10.58%	9.53%	8.59%	10.17%	10.76%
Conglomerates	9.55%	10.43%	10.10%	9.02%	10.82%	9.48%
Utilities	6.25%	9.63%	8.14%	7.96%	6.70%	9.05%
Industrial Products	7.67%	8.80%	8.57%	8.28%	7.72%	8.28%
Oils and Energy	8.75%	8.72%	8.57%	8.13%	7.72%	7.19%
Transportation	8.40%	8.53%	8.43%	6.75%	8.24%	8.49%
Basic Materials	6.06%	7.33%	9.06%	9.50%	7.00%	6.45%
Aerospace	5.96%	7.03%	6.88%	6.14%	6.49%	6.19%
Auto	3.90%	5.71%	6.59%	6.64%	3.76%	5.52%
Construction	2.62%	3.47%	3.10%	1.16%	2.04%	2.34%
Retail/Wholesale	3.87%	3.34%	3.62%	3.50%	4.06%	3.35%
S&P 500	9.28%	9.47%	9.22%	9.35%	8.99%	9.13%
Excluding Financial	8.31%	8.56%	8.57%	8.15%	8.02%	8.09%

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 17 yet to report.
• Late reporters have lower margins historically and projected than the already reported.
• Net margins expected to fall to 5.94% from 7.19% a year ago, and down from 6.17% in the second quarter.
• 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
Basic Materials	na	na	na	na	na	na
Construction	na	na	na	na	na	na
Conglomerates	na	na	na	na	na	na
Aerospace	na	na	na	na	na	na
Oils and Energy	na	na	na	na	na	na
Finance	na	na	na	na	na	na
Utilities	na	na	na	na	na	na
Transportation	na	na	na	na	na	na
Medical	19.47%	18.59%	18.26%	19.87%	20.41%	19.75%
Industrial Products	9.26%	8.63%	9.39%	10.77%	9.12%	7.62%
Computer and Tech	7.43%	7.41%	7.83%	9.09%	9.79%	9.66%
Consumer Staples	4.70%	4.83%	4.22%	4.52%	6.46%	6.33%
Business Service	4.25%	4.24%	4.04%	4.84%	4.77%	5.37%
Retail/Wholesale	2.48%	1.20%	1.73%	1.94%	2.60%	1.37%
Consumer Discretionary	3.93%	-32.35%	-44.78%	29.03%	2.23%	-33.13%
S&P 500	6.34%	5.94%	6.17%	7.42%	7.67%	7.18%

Annual Total Net Income Growth

• Following rise of just 1.9% in 2009, total earnings for the S&P 500 jumps 46.2% in 2010, 14.8% further expected in 2011. Growth ex-Financials 28.0% in 2010, 18.1% in 2011.
• For 2012, 10.2% growth expected. 7.9% ex-Financials.
• Thirteen sectors expected to see total net income rise in 2011 and all in 2012. Utilities only (small) decliner in 2010. Eight sectors expected to post double-digit growth in 2011 and nine in 2012. Only Utilities, Autos, Energy 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, Industrials and Energy expected to grow over 30% 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%	38.83%	3.03%
Basic Materials	-48.08%	60.82%	34.97%	10.81%
Industrial Products	-35.12%	36.61%	32.15%	17.18%
Consumer Discretionary	-15.06%	15.48%	27.76%	13.48%
Computer and Tech	-5.36%	47.24%	22.99%	9.01%
Business Service	1.45%	13.62%	18.79%	12.93%
Auto	- to +	1470.22%	15.93%	2.70%
Retail/Wholesale	2.64%	14.66%	11.04%	12.47%
Consumer Staples	5.35%	11.74%	8.90%	7.92%
Conglomerates	-24.00%	11.10%	8.69%	14.30%
Medical	2.44%	10.24%	7.46%	4.29%
Aerospace	-17.10%	21.38%	6.29%	6.07%
Utilities	-14.20%	-0.64%	4.36%	2.13%
Finance	- to +	316.24%	-0.21%	22.68%
Transportation	-30.19%	81.36%	-4.72%	18.28%
Construction	- to -	- to +	-9.15%	55.63%
S&P 500	1.88%	46.18%	14.82%	10.24%

Annual Total Revenue Growth

• Total S&P 500 Revenue in 2010 rises 7.91% above 2009 levels, a rebound from a 6.40% 2009 decline.
• Total revenues for the S&P 500 expected to rise 5.77% in 2011, 5.14% in 2012.
• Industrials, Materials and Energy to lead revenue race in 2011. Four 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 but Energy 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 9.30% in 2010, 9.59% in 2011 and 5.33% in 2012.

Annual Total Revenue Growth
Sales Growth	2009	2010	2011	2012
Industrial Products	-20.96%	12.34%	18.56%	11.96%
Basic Materials	-16.96%	11.22%	18.53%	7.58%
Oils and Energy	-34.24%	23.74%	18.04%	-1.57%
Auto	-21.40%	8.53%	14.64%	7.17%
Consumer Discretionary	-10.97%	3.87%	14.04%	8.07%
Computer and Tech	-3.69%	15.59%	13.24%	12.54%
Transportation	7.25%	10.70%	13.08%	9.17%
Business Service	-3.61%	4.81%	9.16%	6.93%
Retail/Wholesale	1.40%	4.08%	6.64%	6.64%
Utilities	-6.24%	2.13%	5.39%	3.18%
Medical	6.23%	11.40%	5.01%	1.93%
Conglomerates	-13.51%	0.94%	4.68%	4.10%
Construction	-15.92%	0.47%	4.25%	13.17%
Aerospace	6.51%	-0.34%	-0.50%	5.50%
Consumer Staples	-0.52%	4.79%	-1.97%	5.40%
Finance	21.57%	0.11%	-17.61%	3.57%
S&P 500	-6.40%	7.91%	5.77%	5.14%
Excluding Financial	-10.56%	9.30%	9.59%	5.33%

Annual Net Margins

• Net Margins marching higher, from 5.88% in 2008 to 6.32% in 2009 to 8.58% for 2010, 9.30% expected for 2011. Trend expected to continue into 2012 with net margins of 9.74% expected. Major source of earnings growth.
• Financials significantly distort overall net margins. Net margins ex-financials 7.78% in 2008, 6.98% in 2009, 8.19% for 2010, 8.81% expected in 2011. Expected to grow to 9.01% in 2012.
• Financials net margins soar from -8.42% in 2008 to 15.70% 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 13 sectors expected to post expansion in margins.
• 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%	15.03%	16.33%	15.82%
Finance	2.63%	10.95%	13.26%	15.71%
Medical	13.06%	12.93%	13.23%	13.53%
Business Service	10.07%	10.91%	11.87%	12.54%
Consumer Staples	9.74%	10.39%	11.54%	11.82%
Conglomerates	8.23%	9.06%	9.41%	10.33%
Consumer Discretionary	7.39%	8.21%	9.20%	9.66%
Oils and Energy	5.99%	7.29%	8.57%	8.98%
Industrial Products	6.08%	7.40%	8.25%	8.63%
Transportation	5.78%	9.46%	7.98%	8.64%
Basic Materials	4.76%	6.88%	7.83%	8.07%
Utilities	8.07%	7.85%	7.77%	7.69%
Aerospace	4.93%	6.00%	6.41%	6.44%
Auto	0.36%	5.23%	5.29%	5.07%
Retail/Wholesale	3.00%	3.30%	3.44%	3.63%
Construction	-0.51%	2.67%	2.33%	3.20%
S&P 500	6.32%	8.56%	9.29%	9.74%
Excluding Financial	6.98%	8.17%	8.80%	9.02%

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

• Revisions ratio for full S&P 500 at 1.33, up from 1.16 last week, now slightly bullish. Total revisions activity very close to seasonal peak, change in revisions ratio driven more by new estimates being added, not old ones falling out (higher significance to changes in the revisions ratio).
• Twelve sectors with revisions ratio above 1.0, three above 2.0. Aerospace and Business service lead, Materials and Construction weak.
• Ratio of firms with rising to falling mean estimates at 1.19, up from 1.09 last week, still a neutral reading.
• Total number of revisions (4-week total) nearing (or passing) seasonal highs at 4,491, down from 4,554 last week (-1.4%). Increases at 2,565 up from 2,446 (4.9%), cuts at 1,926, down from 2,108 (-8.6%).

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	1.16	8	1	103	12	8.58	8.00
Business Service	0.89	11	5	134	34	3.94	2.20
Medical	1.03	33	10	316	126	2.51	3.30
Transportation	0.5	5	4	76	40	1.90	1.25
Conglomerates	0.56	6	2	43	24	1.79	3.00
Consumer Discretionary	-0.58	18	12	167	99	1.69	1.50
Retail/Wholesale	-0.96	25	18	262	170	1.54	1.39
Utilities	0.46	24	16	165	115	1.43	1.50
Industrial Products	-0.73	11	10	66	56	1.18	1.10
Finance	-0.02	35	43	442	402	1.10	0.81
Oils and Energy	-1.65	20	21	222	212	1.05	0.95
Auto	3.11	3	4	33	32	1.03	0.75
Consumer Staples	0.69	15	18	104	105	0.99	0.83
Computer and Tech	-0.62	33	33	323	336	0.96	1.00
Basic Materials	-8.12	9	15	81	96	0.84	0.60
Construction	-7.44	4	7	28	67	0.42	0.57
S&P	-0.62	260	219	2565	1926	1.33	1.19

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

• Revisions ratio for full S&P 500 at 0.79, up from 0.69 from last week, still in slightly bearish territory.
• 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, the positive surprises are not translating into higher 2012 expectations.
• Only five sectors have positive revisions ratio (below 1.0). Three sectors with more than two cuts per increase. Autos, Materials and Aerospace very weak.
• Ratio of firms with rising estimate to falling mean estimates at 0.79, up from 0.60, still in bearish territory.
• Total number of revisions (4-week total) at 4,249, down from 4,309 last week (-1.4%).
• Increases at 1,881 up from 1,759 last week (6.9%), cuts fall to 2,369 from 2,550 last week (-7.0%).

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	-0.29	11	7	89	56	1.59	1.57
Transportation	0.09	5	4	53	36	1.47	1.25
Retail/Wholesale	-2.50	27	17	226	196	1.15	1.59
Consumer Discretionary	-1.45	15	15	140	123	1.14	1.00
Industrial Products	-0.67	11	9	57	54	1.06	1.22
Medical	-0.30	24	20	210	224	0.94	1.20
Consumer Staples	-0.47	18	16	97	105	0.92	1.13
Oils and Energy	-2.06	17	24	208	265	0.78	0.71
Finance	-1.44	25	51	303	446	0.68	0.49
Computer and Tech	-2.18	27	41	239	359	0.67	0.66
Conglomerates	-1.15	3	5	21	32	0.66	0.60
Utilities	-0.41	16	21	106	165	0.64	0.76
Construction	-6.91	3	8	32	57	0.56	0.38
Auto	-1.62	2	5	18	40	0.45	0.40
Basic Materials	-4.24	6	18	52	121	0.43	0.33
Aerospace	-2.27	2	7	30	89	0.34	0.29
S&P	-1.59	212	268	1881	2368	0.79	0.79

Total Income and Share

• S&P 500 earned $543.2 billion in 2009, rising to earn $792.8 billion in 2010, $910.3 billion expected in 2011.
• The S&P 500 total earnings expected to hit the $1 Trillion mark in 2012 at $1.004 Trillion.
• Finance share of total earnings moves from 5.9% in 2009 to 18.0% 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 14.9% in 2011, dip to 13.9% 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 11.2% 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	$135,724	$166,929	$181,976	17.12%	18.34%	18.13%	19.01%
Finance	$142,538	$142,234	$174,487	17.98%	15.62%	17.39%	13.67%
Oils and Energy	$97,412	$135,240	$139,336	12.29%	14.86%	13.88%	11.77%
Medical	$100,184	$107,654	$112,272	12.64%	11.83%	11.19%	10.49%
Consumer Staples	$62,862	$68,455	$73,874	7.93%	7.52%	7.36%	9.12%
Retail/Wholesale	$58,165	$64,586	$72,638	7.34%	7.09%	7.24%	9.27%
Utilities	$47,909	$49,997	$51,063	6.04%	5.49%	5.09%	6.36%
Basic Materials	$23,840	$32,177	$35,654	3.01%	3.53%	3.55%	3.25%
Consumer Discretionary	$23,978	$30,633	$34,761	3.02%	3.37%	3.46%	3.86%
Conglomerates	$27,785	$30,198	$34,517	3.50%	3.32%	3.44%	3.42%
Industrial Products	$16,692	$22,059	$25,847	2.11%	2.42%	2.58%	2.59%
Business Service	$14,277	$16,960	$19,154	1.80%	1.86%	1.91%	2.43%
Aerospace	$13,874	$14,747	$15,641	1.75%	1.62%	1.56%	1.41%
Transportation	$14,548	$13,862	$16,396	1.83%	1.52%	1.63%	1.89%
Auto	$11,087	$12,853	$13,200	1.40%	1.41%	1.32%	0.97%
Construction	$1,932	$1,755	$2,732	0.24%	0.19%	0.27%	0.50%
S&P 500	$792,807	$910,336	$1,003,548	100.00%	100.00%	100.00%	100.00%

P/E Ratios

• Trading at 14.62x 2010, 12.74x 2011 earnings, or earnings yields of 6.84% and 7.85%, respectively. P/E for 2012 at 11.55x or earnings yield of 8.66%. 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 2.01%.
• 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 a wide margin.
• S&P 500 earned $56.88 in 2009 rising to $83.18 in 2010. Currently expected to earn $95.46 in 2011 and $104.95 for 2012.
•  

P/E Ratios
P/E	2009	2010	2011	2012
Auto	159.28	10.14	8.75	8.52
Oils and Energy	21.10	14.01	10.09	9.79
Aerospace	14.28	11.76	11.06	10.43
Finance	46.29	11.12	11.14	9.08
Medical	13.38	12.13	11.29	10.83
Basic Materials	25.40	15.80	11.70	10.56
Conglomerates	15.87	14.28	13.14	11.50
Computer and Tech	23.91	16.24	13.20	12.11
Industrial Products	24.53	17.96	13.59	11.60
Consumer Discretionary	21.56	18.67	14.61	12.88
Utilities	15.29	15.39	14.74	14.44
Consumer Staples	18.79	16.81	15.44	14.31
Transportation	27.27	15.04	15.78	13.34
Business Service	22.43	19.74	16.62	14.71
Retail/Wholesale	21.19	18.48	16.64	14.80
Construction	-158.04	30.17	33.21	21.34
.	21.38	14.62	12.74	11.55

Data in this report, unless stated otherwise, is through the close on Thursday 11/17/2011.

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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.
 
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