S&P 500 Likely to Report Highest Earnings Growth in More Than 10 Years in Q2

As of today, the S&P 500 is expected to report (year over-year) earnings growth of 64.0% 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 64.0% 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 at or above 69% for the second quarter, which would be the highest earnings growth reported by the S&P 500 in more than 10 years.

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 7.8% on average. During this same period, 75% 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 6.0 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 63.3%, the actual earnings growth rate for the quarter would be 69.3% (63.3% + 6.0% = 69.3%). If the S&P 500 reports year-over-year growth in earnings of 69.3% in Q2, it would mark the highest (year-over-year) earnings growth rate reported by the index since Q4 2009 (109.1%).

However, during the past four quarters (Q2 2020 through Q1 2021), actual earnings reported by S&P 500 companies have exceeded estimated earnings by 19.7% on average. During these four quarters, 83% 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 17.5 percentage points on average due to the number and magnitude of positive earnings surprises over these past four quarters.

If this average increase is applied to the estimated earnings growth rate at the end of Q2 (June 30) of 63.3%, the actual earnings growth rate for the quarter would be 80.8% (63.3% + 17.5% = 80.8%). If the S&P 500 reports year-over-year growth in earnings of 80.8% in Q2, it would also mark the highest year-over-year earnings growth rate reported by the index since Q4 2009 (109.1%).

Of the 18 S&P 500 companies that have reported actual earnings for Q2 2021 to date, 83% have reported actual EPS above the mean EPS estimate. In aggregate, actual earnings reported by these 18 companies have exceeded estimated earnings by 16.8%. Thus, at this very early stage of the Q2 earnings season, both the number of companies reporting positive earnings surprises and the magnitude of the positive surprises are trending closer to the numbers of the previous four quarters. Since June 30, the earnings growth rate for the S&P 500 has improved by 0.7 percentage points (to 64.0% from 63.3%).

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