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- Second Quarter total net income expected to be down 32.4% year/year
- Early positive surprises lead disappointments by almost 5:1 margin
- Early results much stronger than expected; the median surprise is 7.0%
- Staples only sector expected to post positive growth in second quarter
- 6 sectors expected to decline more than 25%
- Financials expected to rebound after disastrous 2008 (but poor quality EPS)
- Third quarter expected to be down 22.6% year/year
- Estimate cuts and increases for 2009 nearly in balance
- Bottom up estimate for S&P 500 now $59.82 in 2009 versus $59.72 last week.
- S&P 500 now expected to earn $74.48 in 2010 versus $74.24 last week
- Top down estimates $56.54 and $67.79, respectively
Total Net Income Growth
- Early results bad absolutely, but better than expected based on 70 early reports
- Total net income reported $29.5 billion versus $34.6 billion last year; down 14.7%
- Financials only sector up from year ago (easy comps and questionable quality)
- Remaining firms expected to post 36.2% decline
- Staples expected to lead with small increase, followed by small declines in Health Care and Utilities
- Materials and Energy expected to see massive year over year declines
Earnings are coming in much better than expected in the early going. While in this report we have not tracked revenues, there seems to be a general pattern where the source of the positive surprises is coming from much better than expected margins (both operating and net) rather than from better than expected revenue growth.
In other words companies are succeeding in cost cutting their way, if not to prosperity, then at least much better than feared results. While at the individual company level, this is almost always a positive, it is not necessarily so at the macro level. Cutting costs by reducing head count means that there are fewer jobs and less overall demand in the economy.
Still given the weak state of the economy, I suspect most investors will not be too picky about the source of the earnings improvements. The one exception to this might be in the financials where the earnings quality is weak due to FASB caving to political pressure and doing away with mark-to-market accounting. On the other hand, I have not seen any situations of massive mark-to-market of the liabilities but not the assets, like we saw in the first quarter.
The total earnings reported so far of the 70 firms that had reported by the Jul 20 close were $29.5 billion, a decline of 14.7% from the $34.6 billion those same 70 firms reported a year ago. There are only 2 sectors where the actual results that are in are worse than the remaining firms are expected to show, Staples and Industrials.
There are 2 ways of looking at this. The pessimist would say that the good news is getting out of the way early and that results will start to deteriorate. The optimist would say that there is a trend towards better than expected earnings. I lean towards the second explanation. Still, actual earnings growth has been a pretty rare commodity with only 23 of the 70 reporting firms actually posting higher net income than a year ago. I would note that it is still a pretty thin sample and that some sectors have many more reports in than others.
| Sector | Q4 '08 A | Q1 '09 A | Q2 '09 A | Q3 '09 E | 2008 A | 2009 E | 2010 E | ||
| Financials | 780.24% | 557.91% | 8.99% | 353.52% | -112.13% | -323.78% | 76.77% | ||
| Health Care | 7.83% | 3.14% | -1.67% | -0.06% | 16.61% | 1.10% | 9.76% | ||
| Cons. Stap. | -1.44% | -18.93% | -6.40% | -4.97% | 14.76% | -6.06% | 10.14% | ||
| Technology | -21.11% | -21.49% | -10.38% | -14.12% | 16.78% | -12.66% | 27.73% | ||
| Cons. Disc. | -30.34% | -12.93% | -13.04% | -26.75% | 1.58% | -20.63% | 23.30% | ||
| Industrial | -36.17% | -38.60% | -39.93% | -49.27% | -17.43% | -41.92% | 0.89% | ||
| Energy | 10.24% | -30.78% | -56.71% | -66.05% | 10.55% | -57.01% | 4.04% | ||
| Materials | -46.17% | -49.26% | -62.46% | -95.73% | -8.82% | -54.50% | 81.93% | ||
| S&P | -77.41% | 12.60% | -14.70% | -12.01% | -43.30% | 6.74% | 28.60% | ||
| Sector | Q2 '09 | Q2 '08 | Q1 '09 | Q1 '08 |
| Technology | $8,242 | $9,197 | $6,259 | $7,971 |
| Financials | $6,984 | $6,408 | $10,342 | $1,572 |
| Health Care | $5,395 | $5,487 | $5,471 | $5,304 |
| Industrial | $4,112 | $6,845 | $3,441 | $5,604 |
| Cons. Disc. | $2,371 | $2,726 | $2,359 | $2,709 |
| Cons. Stap. | $1,527 | $1,631 | $1,452 | $1,792 |
| Materials | $642 | $1,711 | $802 | $1,580 |
| Energy | $274 | $633 | $398 | $575 |
| S&P | $29,546 | $34,637 | $30,524 | $27,107 |
| Sector | Q4 '08 A | Q1 '09 A | Q2 '09 E | Q3 '09 E | 2008 A | 2009 E | 2010 E | |
| Cons. Stap. | 1.82% | -5.13% | 1.23% | -7.71% | 15.53% | -1.19% | 10.55% | |
| Health Care | 8.32% | -0.17% | -4.37% | -5.86% | 11.42% | -4.10% | 9.81% | |
| Utilties | -0.63% | -1.45% | -8.43% | 0.86% | 1.79% | -2.02% | 8.90% | |
| Telecom | -17.12% | -18.99% | -26.87% | -16.52% | -5.21% | -19.73% | 6.62% | |
| Technology | -17.60% | -29.38% | -32.73% | -26.39% | 21.74% | -19.22% | 19.63% | |
| Industrial | -11.25% | -34.47% | -36.31% | -29.01% | 9.60% | -27.87% | 10.81% | |
| Financials | -576.61% | -49.74% | -37.71% | 260.27% | -103.16% | NM | 49.36% | |
| Cons. Disc. | -110.53% | -50.14% | -40.86% | -2.18% | -34.16% | -2.28% | 44.47% | |
| Energy | -26.75% | -61.07% | -66.86% | -63.98% | 22.10% | -58.47% | 45.72% | |
| Materials | -87.77% | -80.30% | -79.05% | -68.10% | -14.28% | -67.42% | 100.65% | |
| S&P | -55.02% | -34.15% | -36.24% | -24.48% | -11.01% | -17.06% | 23.60% | |
| Sector | Q4 '08 A | Q1 '09 A | Q2 '09 E | Q3 '09 E | 2008 A | 2009 E | 2010 E | |
| Cons. Stap. | 1.54% | -6.34% | 0.59% | -7.50% | 15.47% | -1.59% | 10.52% | |
| Health Care | 8.22% | 0.53% | -3.78% | -4.65% | 12.47% | -3.02% | 9.80% | |
| Utilties | -0.63% | -1.45% | -8.43% | 0.86% | 1.79% | -2.02% | 8.90% | |
| Financials | -992.86% | 4.20% | -24.81% | 278.75% | -106.72% | -640.45% | 57.49% | |
| Technology | -18.78% | -26.97% | -25.25% | -22.28% | 20.08% | -17.09% | 22.40% | |
| Telecom | -17.12% | -18.99% | -26.87% | -16.52% | -5.21% | -19.73% | 6.62% | |
| Cons. Disc. | -96.07% | -43.46% | -35.53% | -9.94% | -27.34% | -7.18% | 39.64% | |
| Industrial | -19.82% | -35.61% | -37.35% | -34.32% | 0.54% | -31.73% | 8.48% | |
| Energy | -26.01% | -60.57% | -66.70% | -64.01% | 21.87% | -58.44% | 44.95% | |
| Materials | -81.98% | -74.07% | -75.70% | -70.42% | -13.36% | -65.12% | 96.30% | |
| S&P | -58.59% | -27.17% | -32.44% | -22.55% | -18.11% | -13.44% | 24.54% | |
Scorecard and Median EPS Growth:
- Positive surprises leading disappointments by almost 5:1 margin
- Median surprise is a very strong 6.99%
- All sectors have more positive surprises than disappointments so far
- Consumer Discretionary the clear leader on almost all fronts
- Median EPS growth -21.1% so far
| Sector | % Reported | Median % Surprise | # Pos Surprise | # Neg Surprise | # Match | ||||
| Cons. Disc. | 22.22% | 12.40% | 18 | 0 | 0 | ||||
| Healthcare | 7.55% | 1.63% | 3 | 1 | 0 | ||||
| Cons. Stap. | 17.07% | 2.44% | 4 | 2 | 1 | ||||
| Materials | 14.29% | 16.03% | 4 | 0 | 0 | ||||
| Tech | 18.67% | 3.69% | 9 | 2 | 3 | ||||
| Industrial | 12.07% | 14.29% | 6 | 1 | 0 | ||||
| Financial | 18.75% | 11.11% | 8 | 5 | 2 | ||||
| Energy | 2.50% | 11.11% | 1 | 0 | 0 | ||||
| S&P 500 | 14.00% | 6.99% | 53 | 11 | 6 | ||||
| Sector | 2Q '09 (A) | 3Q '09 (E) | 2008 (A) | 2009 (E) | 2010 (E) |
| Cons. Disc. | 7.56% | -1.94% | -2.74% | -0.87% | 10.45% |
| Healthcare | 2.30% | 8.23% | 19.02% | 8.28% | 12.01% |
| Cons. Stap. | -2.94% | 1.89% | 11.11% | 5.07% | 9.25% |
| Materials | -29.12% | -21.25% | -7.13% | -21.38% | 2.67% |
| Tech | -36.41% | -36.46% | 14.30% | -33.27% | 13.78% |
| Industrial | -42.59% | -36.54% | -1.01% | -28.23% | 13.84% |
| Financial | -50.88% | -26.92% | -59.38% | -3.09% | 21.38% |
| Energy | -56.52% | -65.79% | 10.53% | -57.00% | 4.04% |
| S&P 500 | -21.08% | -17.23% | -2.01% | -7.37% | 11.17% |
The Zacks Revisions Ratio: 2009
- Revisions ratio for S&P 500 up to 1.02, from 0.96
- Been in near balance for about a month now
- 5 sectors in positive territory; Consumer Sectors and Tech lead
- Industrials, Utilities and Telecom continue to see estimates cut
- Ratio of firms with rising to falling mean estimates up to 0.96 from 0.90
- Total number of revisions (4-week total) up to 2,060 from 1,567 (31.5%)
- Increases up to 1,038 from 766 (35.5%); cuts up to 1,022 from 801 (27.5%)
- Total revisions activity past the low for the quarter; will rise rapidly
Consumer Staples is being lead by General Mills (GIS - Analyst Report) in reaction to its better than expected earnings, with McCormick (MKC - Snapshot Report) also adding some spice to the sector. The revisions ratio for the sector is being held back by Walgreen (WAG - Analyst Report), which was responsible for 45% of all estimate cuts for the sector. If WAG is backed out, the revisions ratio for the sector would be almost 3.0.
Tech is being lead by some of the most prominent names in the sector, Apple (AAPL - Analyst Report), Google (GOOG - Analyst Report) and IBM (IBM - Analyst Report). Corning (GLW - Analyst Report) also deserves an honorable mention.
Financials are a mixed bag, with Goldman Sachs (GS - Analyst Report) gathering lots of upward revisions while the regional banks continue to see a preponderance of estimate cuts.
Discount oriented retailers like Family Dollar (FDO - Analyst Report) and TJX Companies (TJX - Snapshot Report) are leading the Consumer Discretionary sector. In Energy the weakness is concentrated among the refiners like Tesoro (TSO - Analyst Report) and Valero (VLO - Analyst Report).
| Sector | Avg. 4wk EPS Change (FY1) | Revisions Ratio | Firms With FY1 EPS Increase | Firms With FY1 EPS Decrease |
| Technology | 1.63% | 1.62 | 36 | 22 |
| Consumer Staple | 1.46% | 1.62 | 24 | 10 |
| Health Care | 0.02% | 1.37 | 35 | 15 |
| Materials | 0.12% | 1.33 | 11 | 13 |
| Consumer Disc | -1.99% | 1.30 | 35 | 39 |
| Financial Services | -0.93% | 0.82 | 34 | 45 |
| Energy | 0.68% | 0.81 | 21 | 19 |
| Industrials | -1.73% | 0.49 | 17 | 34 |
| Telecom | -0.60% | 0.35 | 1 | 8 |
| Utilities | -0.20% | 0.29 | 8 | 19 |
| S&P 500 | -0.27% | 1.02 | 222 | 224 |
The Zacks Revisions Ratio: 2010
- Revisions stronger for 2010 than 2009
- Revisions ratio steady at 1.17
- Tech and Staples are showing best estimate momentum for 2010
- Industrials and Utilities are getting cut.
- Ratio of rising to falling mean estimates declines to 1.01 from 1.06
- Total revisions activity past lows for the quarter
- Total number of revisions rises to 1,647 from 1,262 (30.5%)
- Estimate increases up to 888 from 681 (30.4%), cuts up to 759 from 581 (30.6%)
| Sector | Avg. 4wk EPS Change (FY2) | Revisions Ratio | Firms With FY2 EPS Increase | Firms With FY2 EPS Decrease |
| Technology | 1.96% | 2.54 | 40 | 16 |
| Consumer Staples | 0.18% | 1.94 | 26 | 9 |
| Health Care | -0.10% | 1.69 | 31 | 20 |
| Consumer Discr | -0.72% | 1.39 | 36 | 36 |
| Financial Services | -3.25% | 1.03 | 30 | 46 |
| Energy | 0.22% | 0.82 | 22 | 17 |
| Materials | -2.65% | 0.79 | 11 | 16 |
| Telecom | 0.16% | 0.62 | 2 | 6 |
| Industrials | -0.83% | 0.49 | 19 | 28 |
| Utilities | -0.71% | 0.29 | 6 | 17 |
| S&P 500 | -0.61% | 1.17 | 223 | 211 |
Earnings Shares and P/Es
- Earnings shares, including historical, based on current make up of S&P 500
- Health Care expected to take earnings crown from Energy in 2009 and keep it in 2010
- Energy’s earnings share is expected to plunge to 11.1% from 23.2%
- Financials’ 2009 earnings share expected to rise to 11.6% from -2.0% in 2008.
- 12-month forward S&P P/E of 14.34 equates to earnings yield of 6.98%, which is very attractive relative to the 10-year T-note yield of 3.49% and nice relative to 5.75% A rated 10 year corporate.
- Health Care the lowest P/E sector for both 2009 and 2010
Earnings Shares and P/Es Sector 2008% 2009% 2010% Market
Cap %P/E
2008P/E
2009P/E
2010Technology 16.95% 16.06% 15.78% 19.49% 15.8 19.3 15.8 Health Care 16.13% 18.09% 15.95% 13.21% 11.3 11.6 10.6 Cons Staple 12.91% 14.69% 13.04% 13.07% 13.9 14.1 12.8 Financials -2.01% 11.55% 14.60% 13.04% nm 18.0 11.4 Energy 23.17% 11.14% 12.96% 11.84% 7.0 16.9 11.7 Industrials 13.53% 10.68% 9.30% 9.73% 9.9 14.5 13.4 Cons Disc. 6.80% 7.30% 8.18% 9.41% 19.0 20.5 14.7 Utilities 4.50% 5.10% 4.46% 3.84% 11.7 12.0 11.0 Materials 3.79% 1.53% 2.41% 3.20% 11.6 33.3 17.0 Telecom 4.23% 3.87% 3.31% 3.17% 10.3 13.0 12.2 S&P 500 100.00% 100.00% 100.00% 100.00% 13.8 15.9 12.8 
Neil Malkin contributed significantly to this report.
Data in this report, unless stated otherwise, is through the close on Monday 7/20/2009
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| GIS | 72.25 | $0.18 | 0.25 % | PREMIUM | PREMIUM |
| GOOG | 568.00 | $7.81 | 1.39 % | PREMIUM | PREMIUM |
| GS | 171.71 | $2.86 | 1.69 % | PREMIUM | PREMIUM |
| IBM | 125.41 | -$0.14 |  -0.11 % | PREMIUM | PREMIUM |
| MKC | 38.11 | $0.14 | 0.37 % | PREMIUM | PREMIUM |
| TSO | 13.67 | $0.34 | 2.55 % | PREMIUM | PREMIUM |
| WAG | 34.57 | $0.18 | 0.52 % | PREMIUM | PREMIUM |
| GLW | 18.56 | $0.16 | 0.87 % | PREMIUM | PREMIUM |
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| Market Summary | Mar 10, 2010 11:39 am ET |
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