Street Earnings Overstated for 71% of S&P 500 in 1Q24

Street Earnings, as reflected in Zacks Earnings, are marketed as being adjusted to remove unusual income and charges. Our Core Earnings[1] show Street Earnings fail to account for a material amount of unusual income and charges, which distorts investors’ view of profitability across the S&P 500. This report shows:

• the prevalence and magnitude of overstated Street Earnings in the S&P 500,
• why Street Earnings (and GAAP earnings) are flawed and not adjusted as promised, and
• five S&P 500 companies with overstated Street Earnings and an Unattractive-or-worse Stock Rating.

212 S&P 500 Companies Overstate EPS by More than 10%

For 373 companies in the S&P 500, or 75%, Street Earnings are higher than Core Earnings[2] for the trailing-twelve-months (TTM) ended 1Q24. In the TTM ended 2Q23, 370 companies overstated their earnings.

When Street Earnings are higher than Core Earnings, they are overstated by an average of 19%, per Figure 1.

Figure 1: Street Earnings Overstated by 19% on Average in TTM Through 1Q24[3]

Sources:  New Constructs, LLC and company filings.

The 373 companies with overstated Street Earnings make up 71% of the market cap of the S&P 500 as of 5/16/24, which is up from 70% in 4Q23.

Note that this analysis is based on our team analyzing the financial statements and footnotes for ~3,000 10-Ks and 10-Qs filed with the SEC after earnings season. We estimate that the cost of this work for most firms would be over $2 million each quarter. To say the least, there is tremendous value in our rigorous analysis of these filings across so many companies so that our clients can discern the best and worst stocks with unrivaled diligence.

Figure 2: Overstated Street Earnings as % of Market Cap: 2012 through 5/16/24

Sources:  New Constructs, LLC and company filings.

For over a third of the S&P 500 (212 companies), Street Earnings are overstated by more than 10% vs. Core Earnings. These 212 companies make up 27% of the market cap of the S&P 500 as of 5/16/24. See Figure 3.

Figure 3: Overstated Street Earnings by > 10% as % of Market Cap: 2012 through 5/16/24

Sources:  New Constructs, LLC and company filings.

The Five Worst Offenders in the S&P 500

Figure 4 shows five S&P 500 stocks with an Unattractive-or-worse Stock Rating and the most overstated Street Earnings (Street Distortion as a % of Street Earnings per share) over the TTM through 1Q24. “Street Distortion” equals the difference between Core Earnings per share and Street Earnings per share. Investors using Street Earnings miss the true profitability, or lack thereof, of these businesses.

Figure 4: S&P 500 Companies with Most Overstated Street Earnings: TTM 1Q24

Sources:  New Constructs, LLC and company filings.
*Measured as Street Distortion as a percent of Street EPS.

In the section below, we detail the hidden and reported unusual items that distort GAAP Earnings for NRG Energy (NRG). All of these unusual income and charges are removed from Core Earnings.

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