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S&P 500 Likely to Report Earnings Growth of More Than 25% for the Fourth Straight Quarter

Earnings

By John Butters  |  January 18, 2022

The S&P 500 is expected to report (year over-year) earnings growth of 21.8% for the fourth 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 21.8% for the quarter?

Based on the five-year average improvement in earnings growth during each earnings season due to companies reporting positive earnings surprises, it is likely the index will report earnings growth of nearly 30% for the fourth quarter, which would be the fourth consecutive quarter of (year-over-year) earnings growth at or above 25%.

sp-500-earnings-growth-end-quarter-estimate-vs-actual

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%).

Over the past five years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 8.6% on average. During this same period, 76% 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 7.6 percentage points on average (over the past five years) due to the number and magnitude of positive earnings surprises.

percentage-point-change-sp-500-earnings-growth-rate

If this average increase is applied to the estimated earnings growth rate at the end of Q4 (December 31) of 21.4%, the actual earnings growth rate for the quarter would be 29.0% (21.4% + 7.6% = 29.0%). If the S&P 500 reports year-over-year growth in earnings of 29.0% in Q4, it would mark the fourth straight quarter of (year-over-year) earnings growth above 25%. The last time the index reported four straight quarters of (year-over-year) earnings growth above 25% was Q4 2009 through Q3 2010.

However, during the past six quarters (Q2 2020 through Q3 2021), actual earnings reported by S&P 500 companies have exceeded estimated earnings by 17.5% on average. During these six quarters, 84% 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 18.4 percentage points on average due to the number and magnitude of positive earnings surprises over these past six quarters.

If this average increase is applied to the estimated earnings growth rate at the end of Q4 (December 31) of 21.4%, the actual earnings growth rate for the quarter would be 39.8% (21.4% + 18.4% = 39.8%). If the S&P 500 reports year-over-year growth in earnings of 39.8% in Q4, it would mark the fourth straight quarter of (year-over-year) earnings growth above 35%. The index has not reported four straight quarters of (year-over-year) earnings growth of 35% or more going back to at least 2008.

Of the 20 S&P 500 companies that have reported actual earnings for Q4 2021 to date, 76% have reported actual EPS above the mean EPS estimate. In aggregate, actual earnings reported by these 20 companies have exceeded estimated earnings by 7.5%. Therefore, at this very early stage of the Q4 earnings season, both the number of companies reporting positive earnings surprises and the magnitude of the positive surprises are trending closer to the five-year average. Since December 31, the earnings growth rate for the S&P 500 has increased by 0.4 percentage points (to 21.8% from 21.4%).

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The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

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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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The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.