Key Points:

• Earnings reports remain ugly, total net income running 37.9% below a year ago
• Surprise ratio of 1.70:1 and median surprise of 2.22% are both below "normal"
• Fourth-quarter total net income expected to be 32.7% below year ago
• Financials red ink is $18.9 billion versus $6.0 Billion black ink last year
• Excluding Financials, total earnings down 20.5% so far
• Still heading south as 2009 expectations fall 2.22% in a week
• More than 1/3 of all 2009 consensus earnings estimates down more than 10%; 1/6 down more than 25% over the last month
• Total net income in 2009 now expected to fall 10.0%, following 13.3% 2008 decline
• P/Es based on 2009 estimates will prove to be to low as "E" plunges
• Bottom up estimate for S&P 500 now $65.12 in 2009, down from $66.60 a week ago; I expect it to be less than $60.

Total Net Income Growth

For those that desperately search for silver linings in the earnings expectations data, the best that can be said is that the rate of decline has slowed somewhat.

The bottom-up consensus earnings estimate declined 2.2% over the last week, but at least that is a much slower decline than the 6.6% decline the week before. However, anyone who thinks that the earnings for the S&P 500 in 2009 will come in at anything close to the current figure of $65.12 is an absolute fool.

When looking at this data, the trend is always more significant than the level at any given date. While down 2.2% is better than down 6.6%, it is still awful any way you cut it. We are talking weekly changes here, not monthly.

If the rate of decline were to slow to 1.0% per week for the rest of the year, that would mean that earnings for the year would be only $41.01. I suspect that it will end up being somewhat higher than that, since I am optimistic that the economic stimulus package will get passed and will start to have some limited impact in the second half. Even so, earnings of $55 for the year seem like a fairly optimistic forecast, but in the right ball park.

The question then becomes, what sort of multiple should one put on those earnings. As of Friday lunchtime, the S&P 500 (SPX) was trading at 868.10, which based on earnings of $55 would put the P/E at 15.8x. To make money holding the S&P 500 then one of two things has to happen. Either I have to be all wet about the $55 earnings level, or the multiple has to expand from this level. Granted interest rates are low and they are depressed earnings, but north of 16x is a pretty princely multiple.

The earnings declines are very widespread. When we combine those that have already reported with the expectations for those yet to report (implicitly assuming no surprises for the yet to report group), 8 of the 10 economic sectors are expected to earn less in the fourth quarter of 2008 than they did in the fourth quarter of 2007, and 7 of those sectors have expected declines of over 19%. The outlook for the first quarter is just as bad, with an expected drop of 28.5% and nine sectors down and one essentially unchanged.