A total of 483 firms, or 96.6% of the S&P 500, have reported. Aside from the Financials and Discretionary firms, the results are encouraging. Positive surprises beat disappointments by a 2.5:1 ratio, which is only slightly below recent historical norms. The median surprise is also inline with recent history at 3.15%.

The median year-over-year EPS growth rate of 9.38% is wonderful news for the market. It indicates that the "typical" firm in the S&P 500 is still growing its EPS at a solid rate.

In terms of median growth, Energy took the gold (+25.4%), with Tech (+21.6%) taking silver and Telecom (+15.5%) bronze. The Financials were clearly the weakest, down 18.2%. Consumer Discretionary was the only other sector to post negative growth, falling 4.2%. (There are still a handful of Discretionary firms left to report.)

In terms of surprises, three sectors had surprise ratios of 6:1 or better: Health Care (6.33), Industrials (6.14) and Telecom (6.00). Every sector had more positive surprises than disappointments, although the margin was very narrow among the Financials, with a surprise ratio of just 1.08. Industrials had the highest median surprise at 5.00%, while Utilities (4.88%), Health Care (4.42%) and Materials (4.17%) were all above 4.0%.

Looking forward to the third quarter, it looks like it should be broadly similar to the second quarter in terms of median growth. For the S&P 500 as a whole, 6.04% growth is expected. However if you factor in about a 3% positive surprise then we are roughly inline with the second quarter.

In terms of sector performance, the general rank ordering is similar. Energy is expected to far outperform all other sectors with growth of 33.3%. Then there is a tight grouping of Industrials, Health Care and Tech between 10.0% and 11.1% growth. Financials (-10.6%) and Consumer Discretionary (-3.0) are once again expected to be the weakest performers.

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 have been ok in the second quarter, the same is not true on a total net income basis. Total net income for the S&P 500 fell by $47 billion or 21.2%. This was 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). The total net income posted by the Financial sector was more than $50 billion below last years levels, while Consumer Discretionary total net income was down close to $11 billion. Overall, the second quarter was even weaker than the first quarter, and on par with the fourth quarter.

However, the news is not bleak everywhere. It looks like Tech just might edge out Energy for the 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 17.7%, but the remaining techs are expected to post declining earnings, down 17.2%, which may drag them out of the Gold medal spot. Health Care looks like it beat out Industrials for the bronze, but with only 8.6% growth to 6.3%, it was not a very inspiring bronze medal performance.

The Financials have once again been a total disaster on the total net income front. Total net income dropped 83.5%. Keep in mind just how important the Financials are in a "normal" year. In last year?s second quarter, they accounted for 27.3% of all S&P 500 earnings at this point. This year they are only raking in 5.7% 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 11.2% of a smaller pie versus 8.7% 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 61.9% from a year ago, and even worse showing than the 18.8% year-over-year decline posted in the first quarter. The 61.9% decline is actually an improvement over the 68.7% decline the sector has posted so far. This year the sector has gathered 2.8% of all earnings for the quarter, down from 7.2% 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 $174.4 billion versus $221.5 billion a year ago. That is, however, a slight improvement on a sequential basis from the $173.6.3 billion these same 483 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 2.19% decline is expected, but that picture is misleading. For starters, projected net income is dropping fast - last week it was at 0.57% decline, and two weeks ago the outlook was for 2.2% growth.

All of the improvement (such as it is) is expected to come from two sources. Financials are expected to suck just a little bit less with a decline of 49.4% from a year ago. (Brace yourself for a bigger decline.) Energy is expected to post eye-popping growth of 51.5%, which will be a very tall order indeed, especially with oil prices slipping in recent weeks. Tech is expected to take Silver with just 6.5% growth while Materials grabs the bronze with 6.1% 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, flat with last week, and up from 1.05 two weeks ago.

The overall pace of estimate revisions has just passed its seasonal peak. Over the last four weeks there have been 3,095 changes in estimates: 1,610 up and 1,485 down, down 17% from 3,727: 1,939 up and 1,788 down last week. This week or next 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.

The tiny Telecom sector grabbed the best revisions ratio this week. Four of the nine components had strong performances. Century Telecom (CTL), Embarq (EQ), Sprint (S) and Verizon (VZ) all had more than 10 estimate increases. On the back of their strong surprise ratios, Industrials and Health Care have strong 2008 revisions ratios, with readings of 2.92 and 2.51, respectively. Surprises have not been as strong for Energy (2.4:1 ratio, 2.65% median surprise). It is down to 1.13, but still positive. Financials remains the weak sister with a reading of 0.47. Notable Health Care stocks on the upside include Express Scripts (ESRX), Medtronic (MDT) and Wyeth (WYE). The Industrials worth noting on the upside include, including Dover (DOV), Goodrich (GR), and Robert Half (RHI).

Unlike 2008, there is no mechanical reason for analysts to raise their numbers for 2009 in response to an earnings surprise. Still it is up slightly into neutral territory. It rose to, 0.84, from 0.80 last week, and 0.79 two weeks ago.

Industrials and Health Care are the two strongest sectors for 2009, with ratios of 1.80 and 1.65, respectively. As with 2007, Energy is slipping but still in positive territory with a reading of 1.28. Financials and Consumer Discretionary are still the two weakest sectors at 0.30 and 0.56, respectively.

The total number of revisions for the whole S&P 500 for 2009 is also past its seasonal peak. There were a total of 2713 revisions: 1,241 up and 1,472 down. This is down 15.8% from 3,221 (1,438 up and 1,788 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 8.6% 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 17.5%. The Financials have plunged to 13.9% of the index. Energy has the third highest weighting at 13.7%. 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 9.7x. However, 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 9.3x, and 8.3x 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 17.8x 2008 and 15.2 x 2009 expectations. Health Care looks interesting trading at 14.5x 2008 and 13.2x 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 15.2x and 12.1x, 2008 and 2009 earnings, respectively. Based on a blend of 50% 2008 earnings and 50% 2009 earnings, that translates to a 7.32% earnings yield, which looks extremely cheap relative to a 3.87% ten year T-note. Even against the A rated corporate bond yield of 6.20% 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 8/21/2008