The results for the 461 firms that have reported are mixed; encouraging in median EPS growth terms, but downright awful in terms of total net income growth. Aside from the Financials and Discretionary firms, however, the results are encouraging.

Positive surprises are leading disappointments by a 2.4:1 ratio, which is only slightly below recent historical norms. The median surprise is also inline with recent history at 3.08%.

The median year-over-year EPS growth rate of 9.33% is wonderful news for the market. And it looks like it will probably hold up. The median expected EPS growth rate for the firms that are yet to report is 16.6%.

Energy is finished reporting and currently holds the Gold medal spot with growth of 25.4%. Tech is in Silver, with median EPS growth of 22.1%. This is based on the results of 63 companies, or 88.7% of the total Tech firms in the index. Absent some significant positive surprises it seems unlikely to overtake Energy in the median EPS growth event. Telecom is in the Bronze medal spot with 15.5%, and it should hold on to its place on the podium.

In the earnings surprise event, two sectors have been particularly impressive. Health Care?s median EPS growth rate is 14.3%. Health Care is showing 6.2 positive surprises for each disappointment, with a median surprise of 4.69%. That however is only good enough for the silver.

The gold goes to the Industrials, which despite a slightly lower growth rate of 13.8%, have posted a surprise ratio of 6.1:1 and a median surprise of 5.00%.

Two sectors could try to make a claim on the bronze, Utilities if the judges were swayed by a high Median surprise of 4.88%, and over looked a surprise ratio of just 1.6:1, or Telecom which had a surprise ratio of 6:1 but just a 3.85% median surprise, would be the two leading contenders.

The Financials have been the weakest sector by far, with the median EPS dropping by 18.2% from a year ago. The sector is responsible for almost one-third of all the earnings disappointments to this point. The Consumer Discretionary sector is the only other one to show negative year-over-year growth on a median EPS basis (-4.0%). The remaining Consumer Discretionary firms are expected to show a 1.3% decrease, meaning that there should not be a big change from what has already been reported. Some of the factors which should help median EPS growth are share repurchases, which though have slowed in recent months, will still reflect what happened last year. Oddly, increased share counts will also help boost EPS among the Financials. Since the ones that have increased their share counts the most (by going hat in had to the sovereign wealth funds looking for new capital) are also the ones that are likely to reports losses, so the loss per share will be less.

In addition, to the extent that firms have large operations overseas, they should benefit from the currency translation effects of the weak dollar. The weak dollar has also boosted those companies that export a substantial portion of their sales.

Keep in mind that median growth rates are inherently equally weighted, so the growth rate for Cabot Oil and Gas (COG) is just as significant to the results for the Energy sector as the growth rate for Exxon (XOM).

Total Net Income Growth

While on a median EPS growth basis, things might look ok, the same is not true on a total net income basis. This has been yet another very ugly quarter.

The blame for net income decline once again goes to the Financials (with best supporting actor nomination for the Consumer Discretionary). Overall, the second quarter is now expected to be even weaker than the first quarter, and on par with the fourth quarter.

However, the news is not bleak everywhere. Tech and Energy are locked in a tight battle for gold in the total net income growth event. Energy has all its results in, and posted 17.3% growth. Tech still has a few to go, and is leading right now with growth of 18.0%, but the remaining techs are only expected to post growth of 3.4%, which should drag them out of the Gold medal spot. Health Care looks like it beat out Industrials for the bronze, but with only 8.4% growth to 6.1%, it was not a very inspiring bronze medal performance.

The Financials have once again been a total disaster on the total net income front. When all is said and done the Financials total earnings are expected to be 83.5% below last year. Keep in mind just how important the Financials are in a "normal" year. In last year?s second quarter, they accounted for 28.5% of all S&P 500 earnings at this point. This year they are only raking in 6.1% of all the earnings.

Of course, since the shares of the pie have to add to 100%, the Financials decline has lead to gains elsewhere in the total earnings pie. How much of an effect is that on the rest of the field? Well, the Consumer Staples sector?s total earnings were virtually identical to its total earnings a year ago. However this year it was responsible for 9.9% of a smaller pie versus 7.7% of total earnings last year.

Things are also falling apart for the Discretionary firms, the only other sector with a smaller sized slice of the earnings pie this year. This is even despite the massive forced lending program known as the stimulus checks. Total net income for the sector is expected to be down 63.2% from a year ago, and even worse showing than the 18.8% year-over-year decline posted in the first quarter. The 63.3% decline is actually an improvement over the 82.2% decline the sector has posted so far. This year the sector has gathered less than 1.3% of all earnings for the quarter, down from 5.9% last year. Since the sector accounts for the bulk of the firms still left to report, that share should grow slightly for both this year an last, but not enough to change the conclusion that is was a very bad quarter for the Discretionary firms.

Total net income for all the S&P 500 firms that have reported so far is $164.3 billion versus $211.4 billion a year ago. That is, however, a slight improvement on a sequential basis from the $161.3 billion these same 461 firms posted in the first quarter.

Looking ahead to the expectations for the third quarter, it looks like we will have another down quarter, but not anywhere near as ugly as the last three have been. Currently a 0.57% decline is expected, but that picture is misleading. All of the improvement (such as it is) is expected to come from two sources. The Financials are expected to suck just a little bit less (don?t count on that happening) with a decline of 42.7% from a year ago. Energy is expected to post eye popping growth of 52.2%, which will be a very tall order indeed, especially with oil prices slipping in recent weeks. No other sector is expected to post more than 6.0% growth.

On the plus side, that does not seem like that big a hurdle. We may be setting up for many positive surprises in the third quarter.

The Zacks Revisions Ratio

To help gauge the direction of the market, we take note of what analysts are thinking. By tallying their EPS changes, we can determine our revisions ratio. This ratio simply divides the total number of positive estimate revisions by the total number of estimate cuts. Thus, a high ratio is a bullish indicator and a low ratio is bearish. For the S&P 500 as a whole, a number below 0.80 or above 1.25 is generally significant. For individual sectors the distance from 1.0 should be greater for the numbers to be significant.

With positive surprises outnumbering disappointments by almost 5:2, it is not a shock that the revisions ratio has started to climb from the depths. After all second quarter earnings are part of full year 2008 earnings, so if a company posts a positive surprise and the analysts don?t raise full year earnings, they are implicitly cutting estimates for the third or fourth quarters. It is now at 1.08, a reading that is neutral, up from 1.05 last week, and 0.98 two weeks ago.

The overall pace of estimate revisions continues its rise, and is approaching its seasonal peak. Over the last four weeks there have been 3,727 changes in estimates (1,939 up and 1,788 down), up 3.5% from 3,600 last week (1,841 up and 1,759 down). This week should mark the peak of total revisions activity for the quarter. The ratio of firms with rising mean estimates to falling mean estimates is 1.02, slightly weaker than the revisions ratio, but also in neutral territory.

On the back of their strong surprise ratios, Health Care and Industrials have moved into the top slots for the 2008 revisions ratio, with readings of 2.94 and 2.57, respectively. Surprises have not been as strong for Energy (2.4:1 ratio, 2.65% median surprise), but it still has a respectable reading of 1.26. Still this is way down from where it was a month or two ago, as lower oil prices work their way into analysts forecasts for this year. Financials and Discretionary are the weak sisters with readings of 0.53 and 0.74, respectively. However, these readings represent a significant improvement over what we were seeing before earnings season.

Notable Health Care stocks on the upside include Johnson & Johnson (JNJ), St. Jude (STJ) and Wyeth (WYE). The Aerospace and Defense names were particularly strong among the Industrials, including General Dynamics (GD), Lockheed Martin (LMT), and Honeywell (HON).

In the Consumer Discretionary sector, the analysts slammed the brakes on the Auto companies Ford (F) and General Motors (GM). In the Financials many of the regional banks continue to get hit, with noteworthy declines in National City (NCC), Regions Financial (RF), Washington Mutual (WM) and Zion (ZION).

Unlike 2008, there is no mechanical reason for analysts to raise their numbers for 2009 in response to an earnings surprise. While it did rise, it remains at the boarder between negative and neutral territory. It rose to, 0.80, from 0.79 last week, and 0.76 two weeks ago.

Health Care takes over at the top of the revisions ratio standings for 2009 this week with a reading of 1.90, while Energy slipped to second with 1.62. Health Care stars include Biogen Idec (BIIB), Express Scripts (ESRX) and St. Jude (STJ). Noteworthy Energy names on the rise include, Baker Hughes (BHI), Massey (MEE) and Southwestern (SWN).

The revisions picture for the Financial sector is even worse for 2009 than it is for 2008, coming in at 0.28, or almost four cuts for every increase. Revisions like these will eat away at the robust earnings rebound seen for 2009 (unless 2008 gets cut faster). If the Financials were excluded, the revisions index would pop to 1.01. We do not seem to be getting out of the woods on the Financial sector front. While there is weakness throughout the sector, some losers worth noting this week include American International Group (AIG), E-Trade (ETFC), Genworth (GNW) and Metlife (MET).

The total number of revisions for the whole S&P 500 for 2009 is also near its seasonal peak. There were a total of 3,221 revisions: 1,438 up and 1,788 down. This is up 4.3% from 3,087 (1,360 up and 1,727 down) last week.. The ratio of firms with rising mean estimates to falling mean estimates is 0.78, in line with the revisions ratio.

Market Cap versus Total Earnings

When making investment decisions, growth should always be looked at in conjunction with how much you are paying for a stock. Thus, it makes sense to look at the total earnings expected for a sector, relative to that sector?s total market capitalization. This is basically a variation on looking at the P/E.

The chart below shows the share of total earnings for 2007, 2008 and 2009, as well as the share of total market capitalization for each sector (the final bar shown). Since the S&P 500 is a market cap weighted index, this is the same as its index weight. On the chart below, the difference between the sizes of the first three bars shows if a sector is gaining or losing "earnings share". The difference between the final bar and the first three bars shows if the sector is selling for an above or below market P/E. If the final bar is smaller than the other bars, the sector is selling for a below market P/E. However, as opposed to just showing the sector P/Es, it also shows the relative importance of the sectors to the overall index.

For years, the Financials were the dominate force in the market, both in terms of market cap, and even more so in terms of total earnings. They have now been decisively dethroned on both counts. On the Market cap front it just recaptured second place from Energy. However, it has now slipped into fifth place based on 2008 earnings. Still, despite their current problems, the Financials are still a very significant influence on the market.

Even with all the disasters in the sector, for 2007, the Financials accounted for 21.8% of the total net income for the S&P 500. In 2008, that is currently expected to decline to 8.8% before rebounding to 17.2% in 2009. However, in recent years the sector has accounted for well over a quarter of all earnings.

Energy has usurped the crown this year, with its earnings share climbing to 22.4% from 15.6% in 2007. Energy should keep the earnings crown for 2009 as well, gathering 20.0% of all the earnings of the S&P 500.

On the market cap (and index weight) front, Tech overtook the Financials a few months ago and currently stands at 17.7%. The Financials have plunged to 14.1% of the index. Energy has the third highest weighting at 13.1%. As recently as the end of February, Financials had a 17.2% index weighting versus 15.7% for Tech and 13.0% for Energy.

Keep in mind that these numbers are snapshots, when you should be thinking about a movie. At the end of February (the first time we had a complete read on 2009), the Financials were expected to gather 22.1% of all earnings for 2008, and Energy was expected to only get 16.0%. For 2009, the expected earnings shares were 15.0% for Energy and 22.4% for Financials. A year ago before the credit crunch hit, Financials were expected to gather 26.3% of 2008 earnings and held a 19.4% weighting in the index. Energy represented just 10.9% of the total market capitalization and was expected to get 12.9% of the total earnings in 2008. In general it seems as if the Energy sector is consistently gaining at least 0.2% of share for each year every week, with a similar decline for the Financials. If those trends continue, then Energy could be as dominate on the earnings front in 2008 and 2009 as the Financials were in 2007 or 2006.

For many years Financials were clearly the dominate factor in the overall market, despite generally selling for below market P/Es. Due to an implosion in earnings that has been far worse than the dismal market performance of the sector, the Financials now have the highest P/Es based on 2008 earnings, displacing the perennial high P/E sector Technology. Based on 2008 earnings, the Financials have a P/E of 24.7x. However, given the expectation that the bleeding will stop next year, the P/E based on 2009 earnings is just 9.9x. Given the pace of estimate cuts in the sector, the true P/E is probably higher since the actual earnings will be significantly lower.

Energy has just taken the throne as the cheapest based on 2008 earnings trading at 9.0x, and 7.9x based on 2009 expectations. There is no question in my mind that Energy is the cheapest sector of the market, and every portfolio should be overweight in it. The Tech sector is still a bit on the expensive side, trading for 18.2x 2008 and 15.5x 2009 expectations. Health Care looks interesting trading at 14.6x 2008 and 13.3x 2009 earnings.

Keep your eyes on the revisions, they give you the best clue as to if the earnings will be achieved and if the P/Es are for real. While the recent declines in oil prices may cause the upwards revisions to moderate for the Energy sector, most analysts are using very conservative price assumptions.

The S&P 500 as a whole is trading for 15.3x and 12.1x, 2008 and 2009 earnings, respectively. Based on a blend of 50% 2008 earnings and 50% 2009 earnings; that translates to a 7.30% earnings yield, which looks extremely cheap relative to a 3.84% ten year T-note. Even against the A rated corporate bond yield of 6.05% it looks attractive. However, the current level of expectations for corporate earnings still implies that profits will stay well above their historical averages as a share of GDP. That would be an exceedingly rare occurrence during a recession. The comparison between the earnings yield on the S&P and the 10 year T-note is in my opinion more a reflection of the extreme unattractiveness of long term T-notes at this point than stocks looking particularly cheap in general, however there are attractive stocks out there. It appears that the flight to quality has caused a massive bubble in the price of T-notes. This is far and away, in my opinion, the most significant bubble in the market today, not the price of oil. The prices are hard to justify given the risk that the massive injections of liquidity by the Fed to ameliorate the credit crunch will end up fueling the fires of inflation.

Neil Malkin contributed significantly to this report.

Data in this report, unless stated otherwise, is through the close on Thursday 8/14/2008