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By John Butters | October 13, 2023
As of today, the S&P 500 is reporting year-over-year earnings growth of 0.4% for the third quarter, which would mark the first quarter of year-over-year earnings growth reported by the index since Q3 2022. Given that most S&P 500 companies report actual earnings above estimates, what is the likelihood the index will report an actual earnings growth of 0.4% for the quarter?
Based on the average improvement in the earnings growth rate during the earnings season, the index will likely report year-over-year growth in earnings or more than 0.4% for Q3.
When companies in the S&P 500 report actual earnings above estimates during an earnings season, the overall earnings growth rate for the index increases because the higher actual EPS numbers replace the lower estimated EPS numbers in the calculation of the growth rate. For example, if a company is projected to report EPS of $1.05 compared to year ago EPS of $1.00, the company is projected to report earnings growth of 5%. If the company reports actual EPS of $1.10 (a $0.05 upside earnings surprise compared to the estimate), the actual earnings growth rate for the company for the quarter is now 10%, five percentage points above the estimated growth rate (10% – 5% = 5%).
In fact, the actual earnings growth rate has exceeded the estimated earnings growth rate at the end of the quarter in 37 of the past 40 quarters for the S&P 500. The only exceptions were Q1 2020, Q3 2022, and Q4 2022.
Over the past ten years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 6.6% on average. During this same period, 74% of companies in the S&P 500 have reported actual EPS above the mean EPS estimate on average. As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate has increased by 5.4 percentage points on average (over the past 10 years) due to the number and magnitude of positive earnings surprises. If this average increase is applied to the estimated earnings decline at the end of Q3 (September 30) of -0.3%, the actual earnings growth rate for the quarter would be 5.1% (-0.3% + 5.4% = 5.1%).
Over the past five years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 8.5% on average. During this same period, 77% of companies in the S&P 500 have reported actual EPS above the mean EPS estimate on average. As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate has increased by 7.3 percentage points on average (over the past five years) due to the number and magnitude of positive earnings surprises. If this average increase is applied to the estimated earnings decline at the end of Q3 (September 30) of -0.3%, the actual earnings growth rate for the quarter would be 7.0% (-0.3% + 7.3% = 7.0%).
Over the past four quarters (Q3 2022 through Q2 2023), actual earnings reported by S&P 500 companies have exceeded estimated earnings by 4.4% on average. During these four quarters, 74% of companies in the S&P 500 reported actual EPS above the mean EPS estimate on average. As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate increased by 1.6 percentage points on average (during the past four quarters) due to the number and magnitude of positive earnings surprises. If this average increase is applied to the estimated earnings decline at the end of Q3 (September 30) of -0.3%, the actual earnings growth rate for the quarter would be 1.3% (-0.3% + 1.6% = 1.3%).
How are the numbers trending to date? Of the 32 S&P 500 companies that have reported actual earnings for Q3 2023 through October 13, 84% have reported actual EPS above the mean EPS estimate. In aggregate, actual earnings reported by these 32 companies have exceeded estimated earnings by 10.1%. Thus, at this very early stage of the earnings season for Q3, both the number of companies reporting positive EPS surprises and the magnitude of these EPS surprises are trending above the 5-year averages. Will this strong performance continue for the rest of the earnings season? Since September 30, the earnings growth rate for the S&P 500 has increased by 0.7 percentage points (to 0.4% from -0.3%).
Here are S&P 500 company earnings calls for the week of October 16 – 20.
This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.
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Mr. John Butters is Vice President and Senior Earnings Analyst at FactSet. His weekly research report, “Earnings Insight,” provides analysis and commentary on trends in corporate earnings data for the S&P 500 including revisions to estimates, year-over-year growth, performance relative to expectations, and valuations. He is a widely used source for the media and has appeared on CNBC, Fox Business News, and the Business News Network. In addition, he has been cited by numerous print and online publications such as The Wall Street Journal, The Financial Times, The New York Times, MarketWatch, and Yahoo! Finance. Mr. Butters has over 15 years of experience in the financial services industry. Prior to FactSet in January 2011, he worked for more than 10 years at Thomson Reuters (Thomson Financial), most recently as Director of U.S. Earnings Research (2007-2010).
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The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.
S&P 500 Will Likely Report Year-Over-Year Earnings Growth for First Time Since Q3 2022 – FactSet Insight
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