Tying DE Themes to the Materials Sector Materials Sectors

The U.S. dollar weakened versus the euro and pound over the past month, though it has recovered in recent weeks as expectations of a weak recovery reined in risk appetites.

Earnings season for the second quarter is essentially over. S&P 500Operating EPS plunged 23% but earnings problems are still concentrated within a few industry groups: Financials and auto and housing-related. Ex-Financial EPS was +6%.

First quarter earnings reports were replete with messages about sales to foreign customers outstripping U.S. results. This report documents why this portion of the expansion is so supportive of overseas business, and which industries and sectors are likely to benefit most in terms of earnings potential.

This report is a preliminary analysis of first quarter earnings for the S&P 500, with 80% of firms reported.

Economic Perspectives

Downgrade Hotels industry equity weighting to Market-Weight from Over-Weight for an 18-month horizon. - Hotel construction is booming. Despite a falling dollar and a healthy global economy, demand for U.S. rooms may not grow enough to overcome the hotel building boom, potentially weakening prices and profits.

DE top-down earnings forecast shows S&P 500 Operating EPS growing above long term trend even as economy slows: 16% in 2006, 9.4% in 2007 and 8% to 9% in 2008. This is more optimistic than Street strategists, but slightly below bottom-up analysts’ consensus, who earlier downgraded energy sector earnings for the coming year after this autumn’s price declines

EPS for the S&P500 grew a spectacular 20% in the third quarter, according to estimates derived from 80% of the companies that have reported to date. 75% of reported companies beat estimates by an average of about 6 percentage points, well above any historical pattern.

Weak PC Sales Are a Drag on Q3 Tech Earnings, but Should Provide Lift in 2007