A recent report has highlighted that Wall Street analysts are overly optimistic about second-quarter earnings expectations for most S&P 500 companies. The report reveals that 75% of S&P 500 companies have Street Earnings that exceed Core Earnings, which are calculated using standardized assumptions to remove non-recurring items. This discrepancy raises concerns about the accuracy of earnings projections for the upcoming quarter.
The report also identifies 373 S&P 500 companies where Street Earnings are higher than Core Earnings in the trailing twelve months ended 1Q24. This represents a concerning trend, with 42% of companies showing Street Earnings overstating Core Earnings by more than 10%. These 212 companies make up 26% of the market cap of the S&P 500 as of 7/8/24, indicating a significant impact on overall market valuations.
When Street Earnings are higher than Core Earnings, they are overstated by an average of 19%, further highlighting the extent of the discrepancy. This raises questions about the reliability of earnings estimates and the potential impact on investment decisions based on these projections. Additionally, errors in historical Street EPS can lead to inaccuracies in future earnings estimates, potentially resulting in missed earnings targets for some companies.
The report also identifies five S&P 500 companies that are likely to miss earnings estimates for the second quarter of 2024 due to overstated Street EPS. These errors in projections can have significant implications for investors and analysts who rely on these estimates for making investment decisions. It is crucial for stakeholders to be aware of the potential distortions in earnings data and to consider additional factors when evaluating investment opportunities.
The analysis is based on a thorough examination of financial statements and footnotes for approximately 3,000 10-Ks and 10-Qs filed with the SEC for 1Q24 results. This comprehensive approach provides valuable insights into the accuracy of earnings data and the potential impact on market valuations. Investors should carefully consider these findings when making investment decisions to ensure they are well-informed and prepared for potential market fluctuations.
It is important to note that the authors of the report, David Trainer, Kyle Guske II, and Hakan Salt, do not receive any compensation for writing about specific stocks, styles, or themes. Their objective analysis provides valuable insights into the potential risks associated with relying on overstated earnings projections and the importance of conducting thorough due diligence before making investment decisions. Stakeholders should carefully consider these findings and take proactive measures to mitigate potential risks in their portfolios.
