Wall Street analysts are too bullish on second quarter earnings expectations for most S&P 500 companies. The percentage of S&P 500 companies whose Street EPS exceeds our Core EPS[1] equals 75% through 1Q24. For the stocks most likely to beat, see 2Q24 Earnings: Where Street Estimates Are Too Low & Who Should Beat.
This report shows:
- the frequency and magnitude of overstated Street Earnings[2] in the S&P 500 and
- five S&P 500 companies likely to miss 2Q24 earnings.
Street EPS Are Higher Than Core EPS for 373 S&P 500 Companies
For 373 companies in the S&P 500, or 75%, Street Earnings are higher than Core Earnings in the trailing twelve months (TTM) ended 1Q24. In the TTM ended 4Q23, Street Earnings were overstated for 370 companies.
The more interesting trend, however, is in the percentage of the S&P 500 where Street Earnings overstate Core Earnings by more than 10%. That number equals 42% (212 companies), which is up from 41% (205 companies) in the TTM ended 4Q23.
Those 212 companies make up 26% of the market cap of the S&P 500 as of 7/8/24, which is up from 25% of the market cap in 4Q23, measured with TTM data in each quarter. See Figure 1.
Figure 1: Overstated Street Earnings by >10% as % of Market Cap: 2012 through 7/8/24
Sources: New Constructs, LLC and company filings.
The 373 companies with overstated (by any amount) Street Earnings make up 70% of the market cap of the S&P 500 as of 7/8/24, which is up from 69% in 4Q23, measured with TTM data in each quarter.
Figure 2: Overstated 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 higher than Core Earnings, they are overstated by an average of 19%, per Figure 3.
Figure 3: Street Earnings Overstated by 19% on Average in TTM Through 1Q24
Sources: New Constructs, LLC and company filings.
Five S&P 500 Companies Likely to Miss 2Q24 Earnings
Figure 4 shows five S&P 500 companies likely to miss calendar 2Q24 earnings because their Street EPS estimates are overstated. 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 Miss 2Q24 EPS Estimates
Sources: New Constructs, LLC, company filings, and Zacks
*Assumes Street Distortion as a percent of Core EPS is the same for 2Q24 EPS as for 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] The Journal of Financial Economics features the superiority of our Core Earnings in Core Earnings: New Data & Evidence.
[2] Street Earnings refer to Zacks Earnings, which are reported to remove non-recurring items using standardized assumptions from the sell-side.