Important note: Keep your focus on the trends in estimates, not on the actual projections! An estimate in motion tends to stay in motion.

Earnings estimates are dropping rapidly, and nearly across the board. This is particularly true for 2009 estimates where a staggering 1 in 4 S&P 500 firms saw their mean estimate fall by more than 15%, and more than 1 in 10 saw a decline of more than 25% over the last month. This means that the currently measured expectations for the fourth quarter and for 2009 are far too high.

The growth rate expected for 2009 has been sustained by the expectations for 2008 dropping at a similar rate. Versus the stable base of 2007 earnings, the expected growth rate has declined from 12.4% to 9.8% in just the past week. It is my personal expectation that that number will fall below 0.0% by Christmas.

Similarly, due to a very weak 4Q in 2007, year-over-year growth in total net income is now expected to be 15.2%, but this is down from 17.7% just last week. The fact that the revisions ratios for 2008 are deeply in negative territory in the face of more positive than negative surprises is a very negative development.

Scorecard and Median EPS Growth Rates

• 392 or 78.4% of S&P Companies have reported through Nov 4 close
• Surprise ratio at 1.86, median surprise at 1.95%, both somewhat below normal
• Median EPS growth at 6.90% is surprisingly good given the economic environment
• Energy (+52.0%), Tech (+12.9%) and Industrials (+12.8%) leading
• Financials (-29.9%) doing the worst
• Expected Growth of 7.7% for those left to report
• Health Care leading on surprise front; Financials disappointing

Positives:

Archer Daniels Midland (ADM) reported EPS of $1.63 per share versus expectations of 70 cents. Last year, the company earned 68 cents per share.

Centerpoint Energy (CNP) reported EPS of 39 cents per share versus expectations for 21 cents. Year ago EPS was 27 cents per share.

Sara Lee (SLE) earned 31 cents per share versus expectations for 21 cents. Last year, SLE earned 28 cents per share.

Negatives:

MBIA (MBI) reported a loss of $2.22 per share versus an expected loss of 29 cents. A year ago, the company generated a $1.52 per share profit.

Marsh & Mclennan (MMC) reported EPS of 21 cents per share; analysts had been expecting 32 cents per share. Last year, MMC earned 19 cents per share.

Pioneer Natural Resources (PXD) earned 91 cents per share, 40 cents less than expectations. Year prior profits were 77 cents.

Duke Energy (DUK) reported EPS of 33 cents versus expectations of 45 cents. A year ago, the company earned 48 cents per share.

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 Mobil (XOM).

Share repurchases were still very significant in the fourth quarter of last year and the first quarter of this year (the data is not out yet for the second quarter) and the reduction in share count also boosts EPS growth.

Currency translation gains will be less of a factor this quarter due to the rebound in the dollar. However, the strong overseas demand that the previously very weak dollar stimulated will still prove to be a boost to the earnings of many firms. The delay is because in the third quarter they will be shipping goods ordered previously. Given both the rebound in the dollar and the very significant economic slowdown abroad, look for the export boom to fade in the fourth quarter and into 2009.

Total Net Income Growth

• Total net income of those that have reported down 9.1% from last year
• Total reported net income so far is $154.9 billion versus $170.1 billion for same firms last year
• Those firms earned $161.3 billion in the second quarter
• Results exclude non-recurring items, most of which have been negative
• Combining results with expectations, earnings now expected to be down 13.6%
• Financials down 96.0% so far, a decline of 104.9% expected when all is said and done
• Excluding Financials, earnings are up 15.1% so far
• Five sectors expected to post lower total earnings than a year ago
• Energy is the only sector expected to post robust growth, up 55.5%, Staples next at 11.2%
• Excluding Energy, earnings are down 21.4%
• Excluding both Energy and Financials earnings are up 4.5%
• Expectations for the fourth quarter?fell?to +15.2% from +17.0% on Thursday, and +17.7% a week ago, but?still looks very optimistic to me.
• Full year net income in 2009 expected to be 9.8% above 2007 levels. Count me as extremely skeptical, I think earnings in 2009 will likely be lower than in 2008, was 12.4% last week

The Zacks Revisions Ratio: 2008

• Revisions ratio for full S&P 500 up to 0.31, from 0.27 on Thursday
• Health Care by far the strongest at 1.07 in response to earnings surprises
• Health Care accounts for 26% of all estimate increases; revisions ratio 0.21 excluding Health Care
• Cuts outnumber increases by more than 3:1 in 7 of 10 sectors
• Ratio of firms with rising to falling mean estimates at 0.27, up from 0.24
• Total number of revisions (4-week total) up to 3,857 from 3,474 on Thursday
• Increases up to 913 from 763; cuts up to 2,944 from 2,711

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. With smaller totals for any given sector than the S&P 500 over all, the ratio should be farther away from 1.0 to be truly significant. However, for the sake of consistency, we refer to readings above 1.25 as being in positive territory and below 0.80 as being in negative territory.

The Zacks Revisions Ratio: 2009

• Full S&P 500 2009 revisions ratio up to 0.13 from 0.12 on Thursday
• More than 10 cuts per increase for 7 sectors
• Health Care the "best" at a 0.46 reading
• Ratio of rising to falling mean estimates down to 0.11 from 0.13
• Total number of revisions up to 3,707 from 3437 on Thursday
• Increases up to 412 from 378, cuts up to 3,295 from 3,059
• Size of cuts horrific: 25% of all S&P firms have 2009 estimates that are?down more than 15% over last 4 weeks; 11% have projections that are down more than 25%
• Only thing holding up 2009 expected growth is the decline of 2008 base

Market Cap versus Total Earnings

• S&P 500 P/E for 2008 12.8 and 10.8x for 2009
• Forward earnings yield of 8.84% wildly attractive relative to 10 year T-note of 3.69%
• Real P/Es are higher (and earnings yields lower) since the "E" is still way too high
• Financials expected to get 6.2% of total S&P earnings in 2008, down from 21.6% in 2007, and?a rebound to 15.5% is expected for 2009. The sector?currently represents 14.6% of total market cap
• Energy's share expected to grow to 22.2% of total in 2008 from 15.6% in 2007,?but is?expected to recede to 18.2% in 2009. The sector represents just 12.8% of the index market cap
• All sectors but Financials and Consumer Discretionary expected to lose earnings share in 2009, although both will be below 2007 shares
• Energy's P/E by far the lowest for both 2008 and 2009, at 7.3x and 7.6x, respectively

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 P/E's are calculated as the total Market Capitalization of the sector divided by the total expected earnings for the sector.

Neil Malkin contributed significantly to this report.

Data in this report, unless stated otherwise, is through the close on Tuesday 11/4/2008