S&P 500 Likely to Report Earnings Growth of More Than 30% for 3rd Straight Quarter

As of October 8, the S&P 500 is expected to report (year over-year) earnings growth of 27.6% for the third 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 27.6% 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 35% for the third quarter, which would be the third consecutive quarter of (year-over-year) earnings growth above 30%.

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 8.4% 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 7.2 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 Q3 (September 30) of 27.5%, the actual earnings growth rate for the quarter would be 34.7% (27.5% + 7.2% = 34.7%). If the S&P 500 reports year-over-year growth in earnings of 34.7% in Q3, it would mark the third straight quarter of (year-over-year) earnings growth above 30%.

However, during the past five quarters (Q2 2020 through Q2 2021), actual earnings reported by S&P 500 companies have exceeded estimated earnings by 19.1% on average. During these five 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 19.5 percentage points on average due to the number and magnitude of positive earnings surprises over these past five quarters.

If this average increase is applied to the estimated earnings growth rate at the end of Q3 (September 30) of 27.5%, the actual earnings growth rate for the quarter would be 47.0% (27.5% + 19.5% = 47.0%). If the S&P 500 reports year-over-year growth in earnings of 47.0% in Q3, it would mark the third straight quarter of (year-over-year) earnings growth above 45%.

Of the 21 S&P 500 companies that have reported actual earnings for Q3 2021 to date, 76% have reported actual EPS above the mean EPS estimate. In aggregate, actual earnings reported by these 21 companies have exceeded estimated earnings by 4.4%. Therefore, at this very early stage of the Q3 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 September 30, the earnings growth rate for the S&P 500 has increased by 0.1 percentage point (to 27.6% from 27.5%).

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