S&P 500 Will Likely Report Year-Over-Year Earnings Growth of At Least 4% for Q4

As of today, the S&P 500 is reporting a year-over-year earnings decline of -0.1% for the fourth quarter, which would mark the fourth decline in earnings in the past five quarters reported by the index. Given that most S&P 500 companies report actual earnings above estimates, what is the likelihood the index will report an actual decline in earnings of -0.1% for the quarter?

Based on the average improvement in the earnings growth rate during the earnings season, the index will likely report year-over-year growth in earnings of more than 4.0% for Q4.

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 rate for the company for the quarter is now 10%, five percentage points above the estimated growth rate (10% - 5% = 5%).

In fact, the actual earnings growth rate has exceeded the estimated earnings growth rate at the end of the quarter in 37 of the past 40 quarters for the S&P 500. The only exceptions were Q1 2020, Q3 2022, and Q4 2022.

Over the past ten years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 6.7% on average. During this same period, 74% 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 5.5 percentage points on average (over the past ten 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 Q4 (December 31) of 1.6%, the actual earnings growth rate for the quarter would be 7.1% (1.6% + 5.5% = 7.1%).

Over the past five years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 8.5% on average. During this same period, 77% 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 Q4 (December 31) of 1.6%, the actual earnings growth rate for the quarter would be 8.8% (1.6% + 7.2% = 8.8%).

Over the past four quarters (Q4 2022 through Q3 2023), actual earnings reported by S&P 500 companies have exceeded estimated earnings by 5.7% on average. During these four quarters, 77% of companies in the S&P 500 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 increased by 2.9 percentage points on average (during the past four quarters) 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 Q4 (December 31) of 1.6%, the actual earnings growth rate for the quarter would be 4.5% (1.6% + 2.9% = 4.5%).

How are the numbers trending to date? Of the 29 S&P 500 companies that have reported actual earnings for Q4 2023 through January 12, 76% have reported actual EPS above the mean EPS estimate. In aggregate, actual earnings reported by these 29 companies have fallen short of estimated earnings by 9.8%. Thus, at this very early stage of the earnings season for Q4, the percentage of companies reporting positive EPS surprises is trending closer to the 1-year and 5-year averages. However, in aggregate companies are missing earnings estimates by 9.8%. As a result, the earnings growth rate for the S&P 500 has decreased by 1.7 percentage points (to -0.1% from 1.6%) since December 31.

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