Pragmatic Capitalism

Capital for Living a More Practical Life


By Dirk Van Dijk, CFA, Zacks Investment Research

Key Points:

  • First quarter season is over. Median surprise of 3.70% and surprise ratio of 3.03 for EPS, 1.32% and 2.23 for revenues. Solid growth of 17.1% (19.1% ex-Financials) reported. Slowdown from fourth quarter pace of 30.9%, mostly due to super financial growth in 4Q. Growth ex-Financials as 19.8% in 4Q.
  • Quarterly net margins rise to 9.40% from 8.73% a year ago, up from 9.02% in fourth quarter. Margins excluding Financials rise to 8.90% from 8.28% last year, 8.83% in fourth quarter. In the second quarter 9.96% net margins expected, 9.44% ex-Financials.
  • Full-year total earnings for the S&P 500 jumps 45.9% in 2010, expected to rise 16.5% further in 2011. Growth to continue in 2012 with total net income expected to rise 12.1%. Financials major earnings driver in 2010. Excluding Financials, growth was 27.7% in 2010, and expected to be 17.1% in 2011 and 10.4% in 2012.
  • Total revenues for the S&P 500 rise 7.80% in 2010, expected to be up 5.83% in 2011, and 6.14% in 2012. Excluding Financials, revenues up 9.19% in 2010, expected to rise 9.62% in 2011 and 6.14% in 2012.
  • Annual Net Margins marching higher, from 5.88% in 2008 to 6.39% in 2009 to 8.65% for 2010, 9.49% expected for 2011 and 10.05% in 2012.
  • Margin Expansion major source of earnings growth. Net margins ex-Financials 7.79% in 2008, 7.08% in 2009, 8.28% for 2010, 8.85% expected in 2011, and 9.22% in 2012.
  • Revisions ratio for full S&P 500 at 1.09 for 2011, at 1.18 for 2012, both neutral readings. Sharp drop from recent weeks, but driven by old increases falling out, not new cuts. Ratio of firms with rising to falling mean estimates at 1.33 for 2011, 1.31 for 2012, marginally positive readings. Total revisions activity near seasonal lows.
  • S&P 500 earned $544.3 billion in 2009, rising to $794.0 billion in 2010, expected to climb to $924.7 billion in 2011. In 2012 the 500 are collectively expected to earn $1.036 Trillion.
  • S&P 500 earned $57.13 in 2009: $83.33 in 2010 and $97.04 in 2011 expected bottom-up. For 2012, $108.79 expected. Puts P/Es at 15.2x for 2010, and 13.1x for 2011 and 11.7x for 2012, very attractive relative to 10-year T-note rate of 2.92%. Top-down estimates, $95.87 for 2011 and $103.94 for 2012.

Soft Data, Falling Revisions Ratios

The first quarter earnings season is done. Net income growth was 17.12%. While that is down from the extremely strong 30.9% the same 495 of the S&P 500 firms posted in the fourth quarter, it is still a very strong growth rate.

Almost all of the growth slowdown is from a failure of the Financial sector to repeat the massive growth it posted in the fourth quarter. Growth excluding the Financials was 19.1%, down only slightly from the 19.8% growth posted in the fourth quarter. Before the first quarter earnings season started, it was expected that growth would be just 6.7% for the S&P 500 as a whole, and 10.2% excluding Financials.

Rate of Growth Slowing

The rate of growth is expected to continue to slow in the second quarter, with total growth of 9.33% and growth of 11.24% if the Financials are excluded. Note, however, that those year-over-year growth expectations are still higher than the expectations for the first quarter before the first quarter earnings season started.

I would be very surprised if we didn’t end up with double-digit growth on both a total and ex-Financials basis. Normally about three times as many firms will report positive surprises as disappointments, and that in turn makes the intial growth projections very conservative.

Revenue Growth Stayed Strong

Revenue growth was also very strong at 8.82%, up from the 8.31% growth the S&P 500 posted in the fourth quarter. Financials are a major drag on revenue growth; if they are excluded, reported revenue growth was 10.80%, up from the 8.35% growth posted last quarter.

Revenue growth is also expected to slow dramatically in the second quarter, falling to 0.62% year over year for the S&P 500 as a whole. Revenue growth is expected to slip to 3.13% if the Financials are excluded. Relative to expectations before the quarter started, the revenue outperformance has been just as spectacular as the earnings performance. Before the earnings season started, growth expectations were just 1.41% overall, and 2.16% if the Financials are excluded.

Net Margin Expansion Slowing

Net margin expansion has been a driver of earnings growth, but that expansion is slowing down, particularly if one excludes the Financials. Overall net margins were 9.40%, up sharply from 8.73% a year ago and from 9.02% in the fourth quarter. Strip away the Financials and the picture is somewhat different, rising to 8.90% from 8.28% a year ago and from the 8.83% reported in the fourth quarter.

At the start of the season, net margins were expected to be 9.13%, and 8.14% excluding the Financials. For the second quarter, total net margins are expected to be 9.96%, and 9.44%, excluding the Financials.

On an annual basis, net margins continue to march northward. In 2008, overall net margins were just 5.88%, rising to 6.39% in 2009. They hit 8.65% in 2010 and are expected to continue climbing to 9.49% in 2011 and 10.05% 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 7.08% in 2009, but have started a robust recovery and rose to 8.28% in 2010. They are expected to rise to 8.85% in 2011 and 9.22% in 2012.

Full-Year Expectations Still Good

The expectations for the full year are very healthy, with total net income for 2010 rising to $794.0 billion in 2010, up from $544.3 billion in 2009. In 2011, the total net income for the S&P 500 should be $924.7 billion, or increases of 45.9% and 16.5%, respectively. The expectation is for 2012 to have total net income passing the $1 Trillion mark to $1.036 Trillion.

That will also put the “EPS” for the S&P 500 over the $100 “per share” level for the first time at $108.79. That is up from $57.13 for 2009, $83.33 for 2010, and $97.04 for 2011. In an environment where the 10-year T-note is yielding 2.92%, a P/E of 15.2x based on 2010 and 13.1x based on 2011 earnings looks attractive. The P/E based on 2012 earnings is 11.7x.

There has been a sharp decline in the ratio of estimate increases to estimate cuts over the last few weeks, with the Revisions ratio for 2011 falling to 1.09 from 1.42 two weeks ago and 1.89 a month ago. For 2012, the ratio is down to 1.18 from 1.67 two weeks ago and 2.03 a month ago. Most of that decline has been due to old estimate increases falling out of the sample than due to a flood of new estimate cuts.

Warning Signs Exist

We are nearing the seasonal low point in estimate revisions activity. While the numbers are still firmly in the neutral zone to slightly on the positive side, the sharp fall off is a bit of a yellow flag. If it continues to be lackluster as revisions activity picks up in a few weeks it will be a significant reason for concern.

The fundamental backing for the market continues to be solid. It is important to keep your eyes on the prize. There is lots of news out there, and much of it is more dramatic than earnings results, but rarely does it have more significance for your portfolio.

Earning are, and are going to remain, the single-most-important thing for the stock market. Interest rates are an important — but distant — second.

That does not mean that all is smooth sailing ahead. In a similar, but contrary nod to history, we are now at the softest part of the year (historically). There is a fair amount of truth to the old adage “Sell in May, but remember to return by November.” Since 1945, the gain on the S&P 500 has averaged 6.8% (ex-dividends) from November through April, but only 1.3% from May through October.

The biggest threat to the market is if the debt ceiling is not raised by the beginning of August. If it looks like it will not happen — watch out. The Government of the United States defaulting on its debt is likely to have a somewhat larger impact on the markets and the economy than the impact of Lehman Brothers defaulting on its debts.

The nation would be shoved right back into recession, and one deeper than the one that followed the Lehman collapse. If that happens, then corporate profits would also collapse. However, when push comes to shove, I find it hard to believe that even Congress could be so stupid as to let that happen.

While not the most likely case, the chance of no increase by the time the ceiling is hit is a very real possibility. Given the disastrous potential consequences, taking out some insurance in the form of “deep out of the money” puts would make a lot of sense at this point.

Low Government Spending Drags

We are already feeling the impact from lower government spending. First quarter GDP growth came in at just 1.8%, down from 3.1% in the fourth quarter. Total government spending was a drag of 1.09 points, up from being a 0.34 point drag in the fourth quarter.

In other words 0.75 of the total 1.30 point growth slowdown (57.8%) was due to increased austerity in Government spending. The recovery is clearly slowing, but so far, that has not shown up in the analysts’ profit forecasts.

Economic Data Softening

The overall tone of the economic data in recent weeks has been on the soft side. We got very disappointing news from the two “mini-ISM’s” last week; the Empire State and Philly Fed reports were both far weaker than expected and showed an actual contraction in manufacturing activity in the mid-Atlantic region.

Initial Claims for unemployment insurance fell by 16,000 but remained above the key 400,000 level of the 10th week in a row. Industrial production rose only 0.1% in May and April was revised lower. However, the headline numbers there were worse than the actual situation. Most of the decline was from the Utility sector and reflected cool weather as much as a slowdown in economic activity.

Manufacturing output rose by 0.4%, recouping most of its 0.5% decline in April. The April decline was mostly due to the supply chain effects of the Japan disaster. Overall Capacity Utilization was unchanged at 76.7%, but factory utilization rose to 74.5% from 74.2%. Both measures remain well below their historical averages, but have improved substantially over the last year.

Utility output plunged 2.8% on the month and utility utilization fell to 79.0% from 81.4%, and is now below the lowest level of the recession. Inflation was also hotter than expected at the core level, with the core CPI up 0.3% versus expectations of a 0.1% increase and higher than the 0.2% level in April. Headline inflation was actually lower than core at 0.2% due to falling gasoline prices. That will probably happen again in June.

Some Data Surprised to the Upside

Not all the economic data was bad. While retail sales fell 0.2%, that was much better than the 0.7% decline that was expected. Also, housing starts were higher than expected at an annual rate of 560,000, up from 541,000 in April, and April was revised sharply higher from a 523,000 rate. Most of the strength, though, was in the volatile multi-family segment, and the absolute level is still just plain awful.

Still, there is hope that the recovery (such as it is) in residential investment will continue as building permits also rose to an annual rate of 612,000, far above the expected 548,000 level and higher than the upwardly revised 563.000 level in April. Overall, though, it looks like economic growth in the second quarter is going to look a lot more like the 1.8% level of the first quarter than a return to the 3.1% level of the fourth quarter.

International Concerns Remain

The international situation clearly has the potential to abort the recovery as well. The disaster in Japan will clearly slow its economy dramatically in the second quarter, although much of that growth will be made up later in the year as the reconstruction process gets under way. Many U.S.-made products have parts which are made in Japan, and that is likely to disrupt production here.

The debt crisis in Europe is not going away. There were riots in Greece protesting the current austerity measures, even as the ECB and Germany are demanding even more in order to get the next tranche of the bailout. Rates for the Greek, Irish and Portuguese debt are substantially higher than when the crisis first started.

It is clear now that at least Greece will be forced to restructure (aka partially default) its debt. The austerity campaigns have weakened those economies and undermined tax revenues, and so the bailouts have not made the situation much better. A Greek default will cause European banks to take a serious hit.

Don’t Despair

On balance I remain bullish, and I think we will end the year with the S&P 500 north of 1400, but that does not mean we will have a smooth ride between here and there. Strong earnings should trump a dicey international situation and the drama in DC (provided it turns out to be just drama, and the game of chicken does not end in tragedy).

Valuations on stocks look very compelling, with the S&P trading from just 13.06x 2011, and 11.65x 2012 earnings. That is extremely competitive with the 2.92% yield on the 10-year Treasury note. In fact, 100 (20%) of the stocks in the S&P 500 now have dividend yields higher than the T-note. However, be prepared to move to the exits (or have some put protection in place) if it looks like the debt ceiling will not be raised.

Since there are virtually no firms that have reported second quarter earnings yet, I am going to omit the Surprise tables and the Reported Quarterly Growth and Margin tables this week.

Expected Quarterly Growth: Total Net Income

  • The total net income of 9.33% is expected, down from 17.08% year-over-year growth in the first quarter (and down from 30.8% growth in the fourth quarter).
  • Sequential earnings growth of 0.42% expected, 2.19 ex-Financials.
  • Growth slowdown mostly due to Financials not repeating extraordinary growth of the fourth quarter.  Growth ex-Financials of 11.24% is expected, versus 19.13% in the first quarter and down from 19.8% in fourth quarter.
  • Very early expectations are for 13.1% year-over-year growth in the third quarter, 14.1% excluding Financials.
  • Energy, Materials and Industrials expected to lead again, Construction and Aerospace expected to post lower total net income than last year.


Quarterly Growth: Total Net Income Expected
Income GrowthSequential Q3/Q2 ESequential Q2/Q1 AYear over Year 2Q 11 EYear over Year 3Q 11 EYear over Year 1Q 11 A
Oils and Energy0.07%11.26%37.75%52.75%40.52%
Basic Materials-4.22%-9.87%32.01%45.12%48.26%
Industrial Products3.39%5.21%24.09%23.69%65.09%
Consumer Discretionary-0.29%11.96%19.13%-0.19%13.37%
Business Service3.96%9.35%15.12%16.93%12.25%
Computer and Tech11.64%-6.66%5.80%8.37%24.88%
Consumer Staples11.35%10.01%3.46%6.58%3.78%
Excl Financials4.60%2.19%11.24%14.09%19.13%

Quarterly Growth: Total Revenues Expected

  • Revenue growth expected to slow sharply, up from the 8.82% growth posted in the first quarter. Ex-Financials growth of 3.18% expected, down from 10.80% in the first quarter.
  • Sequentially revenues 5.27% lower than in the first quarter, down 3.61% ex-Financials.
  • Financials, Aerospace and Utilities sectors have falling revenues, seven sectors post double-digit revenue growth, Industrials and Energy grow sales over 25%.
  • As one would expect in an economic recovery, cyclicals are leading the way on revenue growth. Energy and Materials growth helped by strong commodity prices.


Quarterly Growth: Total Revenues Expected
Sales GrowthSequential Q3/Q2 ESequential Q2/Q1 AYear over Year
2Q 11 E
Year over Year
3Q 11 E
Year over Year
1Q 11 A
Industrial Products-4.73%6.01%25.26%16.12%23.85%
Oils and Energy2.82%8.96%25.09%22.59%17.13%
Basic Materials3.07%7.88%19.48%16.28%18.16%
Computer and Tech-2.48%-5.76%15.74%9.24%15.67%
Consumer Discretionary6.91%-6.51%10.40%13.50%6.48%
Business Service-4.79%-3.45%7.52%7.87%7.21%
Consumer Staples2.14%-7.55%5.80%-4.16%6.41%
S&P 5003.91%-5.27%0.62%3.70%8.82%
Excl Financials4.98%-3.61%3.18%7.28%10.80%

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.
  • Net margins for the full S&P 500 expected to expand to 9.96% from 9.17% a year ago, and up from 9.40% in the first quarter. Net margins ex-Financials rise to 9.41% from 8.76% a year ago but down from 9.44% in the first quarter.
  • Eleven sectors expected to see year-over-year margin expansion, only five to see contraction. Sequentially twelve up and four down. Further margin expansion expected for third quarter, rising to 10.00%, but falling to 9.41% excluding the Financials.
  • Margin expansion the key driver behind earnings growth.


Quarterly: Net Margins Expected
Net MarginsQ3 2011 EstimatedQ2 2011 Estimated1Q 2011 Reported4Q 2010 Reported3Q 2010 Reported2Q 2010 Reported
Computer and Tech17.08%15.72%16.37%17.56%16.51%15.80%
Business Service13.08%13.13%11.90%12.48%11.84%11.78%
Consumer Staples13.04%12.66%10.47%10.59%11.91%10.87%
Oils and Energy9.07%10.33%8.38%7.72%7.19%8.07%
Consumer Discretionary9.58%10.29%9.09%9.98%10.48%9.14%
Industrial Products9.03%9.60%8.69%7.89%8.18%8.18%
Basic Materials7.77%8.83%9.17%6.71%6.27%7.15%
S&P 50010.00%9.96%9.40%9.02%9.17%9.17%
Excl Financials9.41%9.44%8.90%8.83%8.84%8.76%

Annual Total Net Income Growth

  • Following a rise of just 2.1% in 2009, total earnings for the S&P 500 jumps 45.9% in 2010, 16.5% further expected in 2011. Growth ex-Financials 27.7% in 2010, 17.1% in 2011.
  • For 2012, 12.1% growth expected. 10.4% ex-Financials.
  • Auto net income expands more than 15x in 2010, Financial net income more than quadruples.
  • All sectors expected to show total net income rise in 2011 and in 2012. Utilities only (small) decliner in 2010. Eleven sectors expected to post double-digit growth in 2011 and 13 in 2012. Medical the only sector expected to grow less than 5% in 2012.
  • Cyclical/Commodity sectors expected to lead in earnings growth again in 2011 and into 2012.
  • Sector dispersion of earnings growth narrows dramatically between 2010 and 2012, only four sectors expected to grow more than 20% in 2012, seven grew more than 40% in 2010.


Annual Total Net Income Growth
Net Income Growth2009201020112012
Basic Materials-50.26%72.13%40.65%11.19%
Oils and Energy-55.09%50.09%37.86%9.59%
Industrial Products-35.08%36.41%33.79%17.22%
Computer and Tech-5.06%47.83%20.38%10.96%
Consumer Discretionary-15.44%22.51%19.32%14.17%
Business Service1.35%15.95%16.01%13.08%
Construction– to –– to +14.28%36.42%
Auto– to +1457.95%14.02%11.90%
Finance– to +319.87%13.53%20.13%
Consumer Staples5.79%11.72%6.75%8.17%

Annual Total Revenue Growth

  • Total S&P 500 Revenue in 2010 rises 7.80% above 2009 levels, a rebound from a 6.68% 2009 decline.
  • Total revenues for the S&P 500 expected to rise 5.83% in 2011, 6.14% in 2012.
  • Energy 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 four sectors expected to show positive growth below 5%. All sectors see 2012 growth, three in double digits.
  • Aerospace the only sector to post lower top line for 2010. Revenues for Financials were virtually unchanged.
  • Construction, Transportation and Industrials the only sectors expected to post double-digit top line growth in 2012. No sector expected to post falling revenues. Autos Tech and Energy all expected to see revenues grow by more than 8%.
  • Revenue growth significantly different if Financials are excluded, down 10.46% in 2009 but growth of 9.19% in 2010, 9.62% in 2011, and 5.95% in 2012.


Annual Total Revenue Growth
Sales Growth2009201020112012
Oils and Energy-34.41%23.15%21.32%7.45%
Basic Materials-19.30%12.78%16.37%5.65%
Industrial Products-20.96%12.34%16.21%10.84%
Consumer Discretionary-4.95%3.93%13.24%6.98%
Computer and Tech-10.42%15.36%11.52%8.91%
Business Service-2.43%5.99%7.12%5.86%
Consumer Staples-0.36%4.77%-1.74%4.76%
S&P 500-6.68%7.80%5.83%6.14%
Excl Financials-10.46%9.19%9.62%5.95%

Annual Net Margins

  • Net Margins marching higher, from 5.88% in 2008 to 6.39% in 2009 to 8.65% for 2010, 9.49% expected for 2011. Trend expected to continue into 2012 with net margins of 10.05% expected. Major source of earnings growth.
  • Financials significantly distort overall net margins. Net margins ex-Financials 7.78% in 2008, 7.08% in 2009, 8.28% for 2010, 8.85% expected in 2011. Expected to grow to 9.22% in 2012.
  • Financials net margins soar from -8.42% in 2008 to 16.59% expected for 2012.
  • All sectors but Medical and Utilities saw higher net margins in 2010 than in 2009. All sectors but Utilities expected to post higher net margins in 2011 than in 2010. Widespread margin expansion currently expected for 2012 as well with all 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 Margins2009A2010A2011E2012E
Computer and Tech11.86%15.20%16.30%16.72%
Business Service10.78%11.80%12.76%13.65%
Consumer Staples9.85%10.50%11.36%11.78%
Consumer Discretionary7.50%8.84%9.23%9.94%
Oils and Energy6.27%7.65%8.69%8.86%
Industrial Products6.15%7.46%8.56%9.09%
Basic Materials4.47%6.82%8.23%8.67%
S&P 5006.39%8.65%9.49%10.05%
Excl Financials7.08%8.28%8.85%9.22%

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

  • Revisions ratio for full S&P 500 at 1.09, down from 1.42 two weeks ago, now a neutral reading. Nearing seasonal low in activity, meaning changes are driven more by old estimates falling out than new estimates being added (lowering significance of revisions ratio).
  • Four sectors with revisions ratios at or above 2.0. Industrials and Transports lead. Business Service and Energy also strong. Eight sectors with positive revisions ratios, seven negative (below 1.0). Many sector sample sizes very small.
  • Ratio of firms with rising to falling mean estimates at 1.33, down from 1.67, still a bullish reading.
  • Total number of revisions (4-week total) plunging at 1,379, down from 2,264 two weeks ago (-39.1%), and down from 5068 a month ago.
  • Increases at 720 down from 1,330 (-45.9%), cuts at 659, down from 934 (-29.4%).


The Zacks Revisions Ratio: 2011
Curr Fiscal Yr
Est – 4 wks
Industrial Products0.20101045133.461.00
Business Service0.05951452.801.80
Oils and Energy-0.11308121512.373.75
Consumer Staples-0.02191354371.461.46
Computer and Tech-0.0927261061051.011.04
Basic Materials0.1412911130.851.33
Consumer Discretionary0.02181024320.751.80

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

  • Revisions ratio for full S&P 500 at 1.18, down from 1.67 two weeks ago, now in neutral territory.
  • Four sectors have at least two increases per cut. Transports and Industrials lead. Sample sizes very small for many sectors, lowering significance.
  • Five sectors with negative revisions ratio (below 1.0). Construction and Autos especially weak, but small samples.
  • Ratio of firms with rising estimate to falling mean estimates at 1.31, down from 1.84, in bullish territory.
  • Total number of revisions (4-week total) at 1,363, down from 2,118 two weeks ago (-35.6%), and from 4,571 a month ago.
  • Increases at 738 down from 1,324 last week (-44.3%), cuts fall to 625 from 794 last week (-21.3%).


The Zacks Revisions Ratio: 2012
Next Fiscal Yr Est – 4 wks
Firms Up
Firms Down
Ests Up
Ests Down
Firms up/down
Industrial Products0.6515549143.503.00
Business Service0.151051872.572.00
Oils and Energy1.10327129592.194.57
Basic Materials0.9212918111.641.33
Computer and Tech-0.203224106971.091.33
Consumer Staples0.07181637351.061.13
Consumer Discretionary-0.13131424270.890.93

Total Income and Share

  • S&P 500 earned $544.3 billion in 2009, rising to earn $794.0 billion in 2010, $924.7 billion expected in 2011.
  • Early expectations that the S&P 500 total earnings will hit the $1 Trillion mark in 2012 at $1.036 Trillion.
  • Finance share of total earnings moves from 5.9% in 2009 to 17.8% in 2010, 17.4% expected for 2011; 18.7% in 2012, but still well below 2007 peak of over 30%. Energy share also rising going from 11.9% in 2009 to 14.2% 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 10.7% in 2012, down each year.
  • Market Cap shares of Construction, Staples, Retail, Transportation, Industrials and Business Service sectors far exceed earnings shares of any of the years from 2010 through 2012.
  • Earnings shares of Energy, Finance, 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
$ 2010
$ 2011
$ 2012
% Total
S&P Earn
% Total
S&P Earn
% Total
% Total
S&P Mkt
Computer and Tech$134,564$161,991$179,74216.95%17.52%17.34%17.35%
Oils and Energy$97,365$134,224$147,10112.26%14.52%14.19%12.01%
Consumer Staples$62,796$67,034$72,5087.91%7.25%7.00%8.75%
Basic Materials$23,171$32,591$36,2372.92%3.52%3.50%3.24%
Consumer Discretionary$26,440$31,548$36,0193.33%3.41%3.48%4.06%
Industrial Products$16,841$22,531$26,4112.12%2.44%2.55%2.68%
Business Service$12,714$14,749$16,6781.60%1.60%1.61%1.96%
S&P 500$793,985$924,678$1,036,316100.00%100.00%100.00%100.00%

P/E Ratios

  • Trading at 15.21x 2010, 13.06x 2011 earnings, or earnings yields of 6.57% and 7.66%, respectively.  P/E for 2012 at 11.65x or earnings yield of 8.58%.
  • Earnings Yields still very attractive relative to 10-year T-Note rate of 2.92%.
  • Autos have lowest P/E based on 2011 and 2012 earnings. Energy and Financials also in single digits for 2012.
  • Construction has highest P/E for all three years, but falling fast.
  • Auto and Finance high 2009 P/E’s to fall dramatically in 2010 and 2011, continue down in 2012.
  • S&P 500 earned $57.13 in 2009 rising to $83.33 in 2010. Currently expected to earn $97.04 in 2011 and $108.79 for 2012.


P/E Ratios
Oils and Energy22.3614.9010.819.86
Basic Materials29.0916.9012.0210.81
Computer and Tech23.0115.5712.9311.66
Industrial Products26.2419.2414.3812.27
Consumer Discretionary22.7018.5315.5313.60
Consumer Staples18.8016.8315.7614.57
Business Service21.5718.6116.0414.18
S&P 50022.1915.2113.0611.65

FY1 Revisions of More than 5%

The first table below shows the S&P 500 firms with the biggest increases in their FY1 (mostly 2010) mean estimate over the last 4 weeks. The second shows the largest declines. To qualify there must be more than 3 estimates for FY1, and have a mean estimate of more than $0.50. In addition to the change in the mean estimate, the net percentage of estimates being raised is shown for both FY1 and FY2, as well as the P/E ratios based on each year’s earnings is shown.

Note that estimate momentum and value are not mutually exclusive. The most interesting of these firms will be where the net revisions percentage (#up-#dn/Tot) is more than 0.50 but less than 1.00. Big mean estimate changes based on a handful of individual revisions are suspect, but could prove to be the most interesting if other analysts follow suit. On the other hand if all the analysts have raised their estimates already, the mean estimate is less likely to rise again over the next month.

  • This week’s cut off +/- 5%, 5 make increase cut, 12 make decrease cut
  • 1 increases greater than 10%, 6 decreases


Biggest FY1 Revisions (Largest Increases)
Curr Fiscal Yr Est – 4 wks
Next Fiscal Yr Est – 4 wks
# Up-Dn/Tot
Curr Fiscal Yr Est – 4 wks
# Up-Dn/Tot
Next Fiscal Yr Est – 4 wks
P/E using
Curr FY Est
P/E using
Next FY Est
Netapp IncNTAP11.35%9.45%0.880.7723.7820.17
Amer Intl GrpAIG8.70%0.92%
Tiffany & CoTIF6.93%7.34%0.940.7120.7918.01
Cliffs NaturalCLF6.65%7.02%
El Paso CorpEP5.20%5.95%0.500.3617.5914.89
Biggest FY1 Revisions (Largest Declines)
Curr Fiscal Yr Est – 4 wks
Next Fiscal Yr Est – 4 wks
# Up-Dn/Tot
Curr Fiscal Yr Est – 4 wks
# Up-Dn/Tot
Next Fiscal Yr Est – 4 wks
P/E using
Curr FY Est
P/E using
Next FY Est
Cincinnati FinlCINF-35.46%-0.75%-0.570.0039.4819.02
Sunoco IncSUN-25.38%0.25%-0.110.0044.1216.64
Travelers CosTRV-22.26%-1.36%-0.79-0.5811.759.40
Gap IncGPS-19.42%-13.53%-0.96-0.8112.0110.07
Alpha Natrl ResANR-15.40%1.15%-0.330.1310.036.76
Allstate CorpALL-12.58%-0.53%-0.39-0.1916.697.90
Comp ScienceCSC-9.06%-10.39%-0.71-0.408.197.45
Utd States StlX-7.63%-3.54%-0.09-0.0915.877.49
Natl SemiconNSM-6.60%-1.15%-0.61-0.2921.0318.37
Newell RubbermdNWL-5.87%-6.21%-1.00-0.869.278.34
Xl Group PlcXL-5.61%-0.56%-0.47-0.0618.6510.01
Appld Matls IncAMAT-5.23%-4.93%-0.84-0.638.708.58

Data in this report, unless stated otherwise, is through the close on Thursday 6/16/2011.

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.

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

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