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

Earnings

By John Butters  |  July 10, 2020

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?

S&P 500 Earnings Growth End of Qtr Estimate vs Actual

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.

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John Butters

Vice President, Senior Earnings Analyst, Investor Relations

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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