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Will S&P 500 Earnings Decline in Q2?

Earnings

By John Butters  |  July 8, 2016

As of today, the S&P 500 is expected to report a year-over-year decline in earnings of 5.6% for the second quarter. What is the likelihood the index will report an actual earnings decrease of 5.6% for the quarter?

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Based on the average change in earnings growth due to companies reporting actual earnings above estimated earnings, it is likely the index will report a smaller decline in earnings than 5.6%. However, based on this average, the index is still likely to report a year-over-year decrease in earnings for Q2.

How Surprises Impact Earnings

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 for the company for the quarter is now 10%, five percentage points above the estimated growth rate (10% - 5% = 5%).

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Over the past four years, on average actual earnings reported by S&P 500 companies have exceeded estimated earnings by 4.0%. During this same time frame, 68% of companies in the S&P 500 have reported actual EPS above the mean EPS estimates on average. As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate has typically increased by 2.7 percentage points on average (over the past four years) due to the number and magnitude of upside earnings surprises.

Related: EPS Estimate Cuts Smaller Than Average for S&P 500 in Q2

If this average increase is applied to the estimated earnings decline at the end of Q2 (June 30) of -5.4%, the actual earnings decline for the quarter would be -2.7% (-5.4% + 2.7% = -2.7%). If the index does report a decline in earnings for Q2, it will mark the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009.

 

John Butters

Vice President, Senior Earnings Analyst

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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