Will S&P 500 Report an Actual Year-Over-Year Decline in Earnings in Q1 2019?

As of today, the S&P 500 is reporting a decline in earnings of -3.9% for the first quarter. What is the likelihood the index will report an actual decline in earnings of -3.9% for the quarter?

Based on the average change in earnings growth due to companies reporting positive earnings surprises, it is likely the index will report a slight decline in earnings for Q1.

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 4.8%. 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 3.7 percentage points on average (over the past 5 years) due to the number and magnitude of upside earnings surprises.

If this average increase is applied to the estimated earnings decline at the end of Q1 (March 31) of -4.0%, the actual earnings decline for the quarter would be -0.3% (-4.0% + 3.7% = -0.3%).  If the index does report a decline in earnings in Q1 2019, it will mark the first time the index has reported a year-over-year decline in earnings since Q2 2016. 

However, it is interesting to note that the S&P 500 is currently outperforming the 5-year averages in terms of actual earnings relative to estimated earnings. To date, 78% of S&P 500 companies are reporting actual EPS above estimated EPS, which is above the 5-year average of 72%. S&P 500 companies are beating EPS estimates by 5.7%, which is also above the 5-year average of 4.8%.  If these trends continue, the earnings growth rate should increase by more than the 3.7 percentage point average, which could result in the index reporting actual year-over-year growth in earnings for the quarter.