S&P 500 Likely to Report Largest Year-Over-Year Earnings Decline in Q2 Since 2008

As of today, the S&P 500 is expected to report a decline in earnings of -44.6% for the second quarter. What is the likelihood the index will report an actual decline in earnings of -44.6% for the quarter?

Based on the average change in earnings growth due to companies reporting positive earnings surprises, it is likely the index will still report a year-over-decline in earnings of more than 40% for Q2.

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 on average, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 4.7%. 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 typically increased by 3.0 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 decline at the end of Q2 (June 30) of -44.0%, the actual earnings decline for the quarter would be -41.0% (-44.0% + 3.0% = -41.0%). If the S&P 500 reports a year-over-year decline in earnings of -41.0%, it will be the largest year-over-year decline in earnings reported by the index since Q4 2008 (-69.1%).

It should be noted that in the previous quarter, the actual earnings decline (-15.0%) was much larger than the estimated earnings decline at the end of the quarter (-6.9%), as analysts made unusually large cuts to EPS estimates after the end of the quarter and fewer companies reported positive EPS surprises than average. The last time the actual earnings growth rate was lower than the estimated earnings growth rate at the end of the quarter was Q4 2010.