S&P 500 Likely to Report Earnings Growth Between 9% and 12% for Q2 2022

As of today, the S&P 500 is expected to report (year over-year) earnings growth of 4.3% for the second quarter. Given that most S&P 500 companies report actual earnings above estimates, what is the likelihood the index will report actual growth in earnings of 4.3% for the quarter?

Actual Earnings Tend to Exceed Estimates

Based on the average improvement in earnings growth during each earnings season due to companies reporting positive surprises, it is likely the index will report earnings growth between 9% and 12% for the second quarter.

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

In fact, the actual earnings growth rate has exceeded the estimated earnings growth rate at the end of the quarter in 39 of the past 40 quarters for the S&P 500. The only exception was Q1 2020.

Creating a Range of Possible Earnings Growth Outcomes

Over the past five years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 8.8% on average. During this same period, 77% of companies in the S&P 500 have reported actual EPS above the mean EPS estimate on average. As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate has increased by 8.1 percentage points on average (over the past five years) due to the number and magnitude of positive earnings surprises.

If this average increase is applied to the estimated earnings growth rate at the end of Q2 (June 30) of 4.1%, the actual earnings growth rate for the quarter would be 12.2% (4.1% + 8.1% = 12.2%). If the S&P 500 reports year-over-year growth in earnings of 12.2% for Q2, it would mark the fifth time in the past six quarters that the index has reported (year-over-year) earnings growth above 10%.

Over the past 10 years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 6.5% on average. During this same period, 72% of companies in the S&P 500 have reported actual EPS above the mean EPS estimate on average. As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate has increased by 5.5 percentage points on average (over the past 10 years) due to the number and magnitude of positive earnings surprises.

If this average increase is applied to the estimated earnings growth rate at the end of Q2 (June 30) of 4.1%, the actual earnings growth rate for the quarter would be 9.6% (4.1% + 5.5% = 9.6%). If the S&P 500 reports year-over-year growth in earnings of 9.6% for Q2, it would mark the second straight quarter that the index reported (year-over-year) earnings growth below 10%.

Early Positive Earnings Surprises for Q2

Of the 18 S&P 500 companies that have reported actual earnings for Q2 2022 to date, 72% have reported actual EPS above the mean EPS estimate. In aggregate, actual earnings reported by these 18 companies have exceeded estimated earnings by 3.5%.

Therefore, at this very early stage of the Q2 earnings season, the number of positive earnings surprises is closer to the 10-year average than the five-year average, while the magnitude of the positive surprises is below both the five-year average and the 10-year average. Since June 30, the earnings growth rate for the S&P 500 has increased by 0.2 percentage points (to 4.3% from 4.1%).

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