S&P 500 Likely to Report Earnings Growth of More Than 10% for Fifth Straight Quarter

As of today, the S&P 500 is expected to report (year over-year) earnings growth of 4.5% for the first 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 4.5% for the quarter?

Positive Earnings Surprises Are Likely to Boost Q1 Earnings Growth

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 of more than 10% for the first quarter, which would be the fifth consecutive quarter of (year-over-year) earnings growth above 10%.

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%).

Earnings Tend to Exceed Estimates

Over the past five years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 8.9% 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 Q1 (March 31) of 4.7%, the actual earnings growth rate for the quarter would be 12.8% (4.7% + 8.1% = 12.8%). If the S&P 500 reports year-over-year growth in earnings of 12.8% in Q1, it would mark the fifth straight quarter of (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 Q1 (March 31) of 4.7%, the actual earnings growth rate for the quarter would be 10.2% (4.7% + 5.5% = 10.2%). Again, if the S&P 500 reports year-over-year growth in earnings of 10.2% in Q1, it would mark the fifth straight quarter of (year-over-year) earnings growth above 10%.

First-Quarter Earnings on Track to Beat Estimates

Of the 20 S&P 500 companies that have reported actual earnings for Q1 2022 to date, 70% have reported actual EPS above the mean EPS estimate. In aggregate, actual earnings reported by these 20 companies have exceeded estimated earnings by 2.1%.

Therefore, at this very early stage of the Q1 earnings season, both the number of companies reporting positive earnings surprises and the magnitude of the positive surprises are below the five-year average and 10-year average. Since March 31, the earnings growth rate for the S&P 500 has decreased by 0.2 percentage points (to 4.5% from 4.7%).

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