While Street Earnings[1] overstate profits for the majority of S&P 500 companies, as shown in Street Earnings Overstated for 71% of S&P 500 in 1Q24, there are many S&P 500 companies whose Street Earnings are lower than their Core Earnings[2].
This report shows:
- the frequency and magnitude of understated Street Earnings in the S&P 500,
- five S&P 500 companies likely to beat 2Q24 earnings.
Street EPS Are Lower Than Core EPS for 122 S&P 500 Companies
For 122 companies in the S&P 500, or 24%, Street Earnings are lower than Core Earnings in the trailing-twelve-months (TTM) ended 1Q24. In the TTM ended 4Q23, Street Earnings were understated for 125 companies.
The percentage of the S&P 500 where Street Earnings understate Core Earnings by more than 10% equals 8% (41 companies) in 1Q24, which is down from 43 companies in the TTM ended 4Q23.
Those 41 companies make up 6% of the market cap of the S&P 500 as of 7/8/24, same as what we saw for 4Q23, measured with TTM data in each quarter. See Figure 1.
Figure 1: Understated Street Earnings by >10% as % of Market Cap: 2012 through 7/8/24
Sources: New Constructs, LLC and company filings.
The 122 companies with understated (by any amount) Street Earnings represent 30.2% of the market cap of the S&P 500 as of 7/8/24, which is up from 29.8% in the TTM ended 4Q23. See Figure 2.
Figure 2: Understated Street Earnings as % of Market Cap: 2012 through 7/8/24
Sources: New Constructs, LLC and company filings.
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 for 1Q24 results. 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.
When Street Earnings are lower than Core Earnings, they are understated by an average of 16%, per Figure 3.
Figure 3: Street Earnings Understated by 16% on Average in TTM Through 1Q24
Sources: New Constructs, LLC and company filings.
Five S&P 500 Companies Likely to Beat Calendar 2Q24 Earnings
Figure 4 shows five S&P 500 companies likely to beat calendar 2Q24 earnings because their Street EPS estimates are understated. Because investors and analysts tend to anchor their earnings projections to historical results, errors in historical Street EPS lead to errors in Street EPS estimates.
Figure 4: Five S&P 500 Companies Likely to Beat 2Q24 EPS Estimates
Sources: New Constructs, LLC, company filings, and Zacks
*Assumes Street Distortion as a percentage of Core EPS is the same in 4Q23 as the TTM ended 1Q24
This article was originally published on July 12, 2024.
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
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[1] Street Earnings refer to Zacks Earnings, which are adjusted to remove non-recurring items using standardized sell-side assumptions.
[2] The Journal of Financial Economics features the superiority of our Core Earnings in Core Earnings: New Data & Evidence.