The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth for the S&P 500 increased to 0.1% this past week, which is above the year-over-year decline of 0.4% at the end of last week and the estimated year-over-year decline of 4.7% at the end of the first quarter (March 31). This week marks the first time since January in which earnings for the first quarter reflect a year-over-year increase.
The 4.8 percentage point improvement in the earnings growth rate (to 0.1% from -4.7%) since March 31 is above the five-year average improvement in growth of 3.1 percentage points during a typical earnings season. What is behind the above average increase in the earnings growth rate for the first quarter during this earnings season?
Two factors typically drive the improvement in the earnings growth rate during an average earnings season: the number (or percentage) of companies that report earnings above estimates and the aggregate amount by which companies report earnings above (or below) estimates.
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 4.8% upside earnings surprise compared to the estimate), the actual earnings growth for the company for the quarter is now 10%, five percentage points above the estimated growth rate (10% - 5% = 5%).
For Q1 to date, the percentage of companies reporting earnings above estimates (71%) is slightly below the five-year average (73%). Thus, the percentage of companies reporting earnings above estimates is not the main cause of the above average increase in the earnings growth rate since March 31, as this percentage is actually below the five-year average.
However, the aggregate amount by which companies are reporting earnings above estimates for Q1 (6.4%) is well above the five-year average (5.4%). In fact, if 6.4% is the final surprise percentage for the quarter, it will mark the highest surprise percentage for a quarter since Q1 2011 (7.0%). Thus, the above average surprise percentage for Q1 is the main driver of the above average increase in the Q1 earnings growth rate since March 31.
The impact of the high surprise percentage on earnings growth rates can be seen at the sector level. The sectors that have reported the largest surprise percentages of all ten sectors to date have also recorded the highest increases in their earnings growth rates since March 31 of all 10 sectors.
The Energy sector has recorded the largest surprise percentage to date at 28.7%. Since March 31, the Energy sector has also witnessed the third highest percentage point improvement in earnings growth at 7.9 percentage points (to -56.6% from -64.5%).
The Health Care sector has recorded the second largest surprise percentage to date at 10.5%. Since March 31, the Health Care sector has also witnessed the highest percentage point improvement in earnings growth at 10.8 percentage points (to 22.3% from 11.5%).
The Materials sector has recorded the third largest surprise percentage to date at 7.5%. Since March 31, the Materials sector has also witnessed the fourth highest percentage point improvement in earnings growth at 4.9 percentage points (to -1.2% from -6.1%).
The chart below compares the surprise percentage for each sector with the percentage point change in earnings growth since March 31.
Don't miss part two of this week's report.