According to a recent report on Zacks Earnings, Street Earnings, which are adjusted to remove unusual income and charges, are found to be overstated in the S&P 500. Core Earnings reveal that Street Earnings do not accurately represent the profitability of companies due to the failure to account for a significant amount of unusual income and charges. This distortion misleads investors about the true financial health of companies in the S&P 500.
The report highlights that for 373 companies in the S&P 500, or 75%, Street Earnings are higher than Core Earnings for the trailing twelve months ended in the first quarter of 2024. This percentage is increased from the previous year when 370 companies overstated their earnings. On average, when Street Earnings are higher than Core Earnings, they are overstated by 19%, according to the research.
Based on the latest audited financial data, which is the 1Q24 10-Q in most cases, the report reveals that 373 companies with overstated Street Earnings make up 71% of the market capitalization of the S&P 500 as of 5/16/24. Additionally, for over a third of the S&P 500, 212 companies have Street Earnings that are overstated by more than 10% compared to Core Earnings, making up 27% of the market capitalization of the index.
The analysis conducted by the research team is based on examining around 3,000 10-Ks and 10-Qs filed with the Securities and Exchange Commission after earnings season. The report also identifies five S&P 500 companies with the most overstated Street Earnings and an unattractive-or-worse Stock Rating. These companies have a significant difference between their Core Earnings per share and Street Earnings per share, indicating that investors using Street Earnings may not have an accurate understanding of the profitability of these businesses.
The report aims to shed light on the flaws in Street Earnings and GAAP earnings, which are not adjusted as promised, causing a distortion in investors’ view of the financial performance of companies in the S&P 500. By providing a detailed analysis of the prevalence and magnitude of overstated Street Earnings in the index, the report urges investors to consider Core Earnings as a more accurate measure of a company’s profitability.
Disclosure: The authors of the report, David Trainer, Kyle Guske II, and Hakan Salt, do not receive any compensation to write about specific stocks, styles, or themes. Their research aims to provide investors with a clearer understanding of the true financial health of companies in the S&P 500 and the importance of considering Core Earnings over Street Earnings for more accurate investment decisions.
