S&P 500 Companies Are Reporting Smaller EPS Surprises for 7th Straight Quarter in Q4

With 82% of S&P 500 companies reporting results for Q4 2022 to date, aggregate earnings reported by these companies have exceeded estimated earnings by 1.3%. How does this earnings surprise percentage compare to recent averages?

The earnings surprise percentage for Q4 2022 is below the 1-year average (+3.7%), below the 5-year average (+8.6%), and below the 10-year average (+6.4%).

In fact, the fourth quarter currently marks the second-lowest earnings surprise percentage reported by the index since Q4 2008, trailing only Q1 2020 (+1.1%). It also marks the seventh consecutive quarter in which the EPS surprise percentage for the index has decreased.

What is driving the continuing decline in the earnings surprise percentage for the S&P 500?

In early 2021, analysts underestimated the earnings recovery from the COVID-19 lockdowns, which resulted in more S&P 500 companies beating EPS estimates than average and by wider margins than average. From Q1 2021 through Q3 2021, 85% of S&P 500 companies on average reported a positive EPS surprise, and no sector reported a negative earnings surprise percentage during these three quarters. Thus, the earnings surprise percentages for these early quarters were much higher than normal.

In more recent quarters, analysts have overestimated earnings for companies in specific sectors and industries, as economic growth has been slower and inflation has been higher relative to early 2021. This has resulted in fewer companies beating EPS estimates than average and some of the larger companies in the index missing EPS estimates during this period. Over the past three quarters (Q2 2022 through Q4 2022), 71% of S&P 500 companies on average have reported a positive EPS surprise, and at least two sectors have reported a negative earnings surprise percentage in each of these three quarters. Thus, the earnings surprise percentages for these more recent quarters have been much lower than normal.

For Q4 2022, two sectors are currently reporting a negative earnings surprise percentage: Communication Services (-4.1%) and Consumer Discretionary (-0.4%).

In the Communications Services sector, the negative EPS surprises reported by Alphabet ($1.05 vs. $1.18) and Facebook ($1.76 vs. $2.26) are significant contributors to the negative surprise percentage for the sector.

In the Consumer Discretionary sector, the negative EPS surprise reported by Amazon.com ($0.03 vs. $0.17) is a substantial contributor to the negative surprise percentage for the sector.

Outside of these two sectors, other companies that have reported negative EPS surprises that have lowered the overall EPS surprise percentage for the index include Apple ($1.88 vs. $1.94), Boeing (-$1.75 vs. $0.18), and Goldman Sachs ($3.32 vs. $5.56).

Due to a combination of the lower earnings surprise percentage and continued downward revisions to EPS estimates after the end of the quarter, the S&P 500 is reporting a larger earnings decline today (-4.7%) relative to expectations at the end of the quarter (-3.3%) on December 31. If -4.7% is the actual earnings decline for the quarter, it would mark just the third time in 10 years, but also the second straight quarter, in which actual earnings for the index finished lower than estimated earnings for the index at the end of the quarter.

Despite the below-average surprise percentage for the quarter, the market is punishing S&P 500 companies that report negative EPS surprises for Q4 less than average. For more details, please see our recent article: Market Punishing Negative EPS Surprises Less Than Average for S&P 500 Companies for Q4. 

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