Street Earnings Overstated for 67% of S&P 500 Companies in 1Q22

Articles From: New Constructs
Website: New Constructs


Investment Analyst

New Constructs

GAAP Earnings exaggerated the drop in 2020 and overstated the rebound in S&P 500 earnings in 2021. In the trailing-twelve-months (TTM) ended 1Q22, GAAP earnings continue to overstate the growth in Core Earnings[1].  We see the same trends in Street Earnings, as reflected in Zacks Earnings, which are reported to be adjusted to remove non-recurring items. This report shows:

  • the prevalence and magnitude of overstated Street Earnings in the S&P 500
  • why Street Earnings (and GAAP earnings) are flawed and not adjusted as promised
  • five S&P 500 companies with overstated Street Earnings and an Unattractive-or-worse Stock Rating

Over 180 S&P 500 Companies Overstate EPS by More than 10%

For 333 companies in the S&P 500, Street Earnings overstate Core Earnings[2] for the trailing-twelve-months (TTM) ended calendar 1Q22. In the TTMs ended 1Q21 and calendar 2021, 362 companies and 336 companies overstated their earnings, respectively.

When Street Earnings overstate Core Earnings, they do so by an average of 19% per company, per Figure 1. For over a third of S&P 500 companies, Street Earnings overstate Core Earnings by >10%.

Figure 1: Street Earnings Overstated by 19% on Average in TTM Through 1Q22[3]

Street Earnings Overstated by 19% on Average in TTM Through 1Q22

Sources:  New Constructs, LLC and company filings.

The 333 companies with overstated Street Earnings make up 70% of the market cap of the S&P 500 through 5/16/22, which is down from 79% through 2021, measured with TTM data in each quarter.

The drop from the prior TTM period is driven largely by Microsoft (MSFT) and NVIDIA Corporation’s (NVDA) Street Earnings falling from overstated through 2021 to understated through 1Q22. Combined, these two firms make up 7% of the S&P 500 market cap through 5/16/22.

Figure 2: Overstated Street Earnings as % of Market Cap: 2012 through 5/16/22

Overstated Street Earnings as % of Market Cap: 2012 through 5/16/22

Sources:  New Constructs, LLC and company filings.

Click here to read the full article.

This article originally published on May 27, 2022.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

Follow us on TwitterFacebookLinkedIn, and StockTwits for real-time alerts on all our research.

[1] The Journal of Financial Economics features the superiority of our Core Earnings in Core Earnings: New Data & Evidence.

[2] Our Core Earnings research is based on the latest audited financial data, which is the calendar 1Q22 10-Q in most cases. Price data as of 5/16/22.

[3] Average overstated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.

Click here to download a PDF of this report.

Disclosure: New Constructs

David Trainer, Kyle Guske II, Sam McBride, Matt Shuler, Alex Sword, and Andrew Gallagher receive no compensation to write about any specific stock, style, or theme.

About New Constructs
New Constructs leverages cutting-edge Robo-Analyst technology to provide insights and diligence on stocks, ETFs, mutual funds & debt issuers. Highly-respected public and private institutions believe in our concepts::

– Fundamental data and earnings: Core Earnings: New Data and Evidence

– Models for NOPAT, Invested Capital and Return on Invested Capital (ROIC): Getting ROIC Right

– Stock ratings: Robot Analysts Outwit Humans on Investment Picks

The information and opinions presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or solicitation of an offer to buy or sell securities or other financial instruments. New Constructs has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor and nothing in this report constitutes investment, legal, accounting or tax advice. This report includes general information that does not take into account your individual circumstance, financial situation or needs, nor does it represent a personal recommendation to you. The investments or services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about any such investments or investment services.

Information and opinions presented in this report have been obtained or derived from sources believed by New Constructs to be reliable, but New Constructs makes no representation as to their accuracy, authority, usefulness, reliability, timeliness or completeness. New Constructs accepts no liability for loss arising from the use of the information presented in this report, and New Constructs makes no warranty as to results that may be obtained from the information presented in this report. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information and opinions contained in this report reflect a judgment at its original date of publication by New Constructs and are subject to change without notice. New Constructs may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and New Constructs is under no obligation to insure that such other reports are brought to the attention of any recipient of this report.

New Constructs’ reports are intended for distribution to its professional and institutional investor customers. Recipients who are not professionals or institutional investor customers of New Constructs should seek the advice of their independent financial advisor prior to making any investment decision or for any necessary explanation of its contents.

In-depth risk/reward analysis underpins our stock rating. Our stock rating methodology grades every stock according to what we believe are the 5 most important criteria for assessing the quality of a stock. Each grade reflects the balance of potential risk and reward of buying that stock. Our analysis results in the 5 ratings described below. Very Attractive and Attractive correspond to a “Buy” rating, Very Unattractive and Unattractive correspond to a “Sell” rating, while Neutral corresponds to a “Hold” rating.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from New Constructs and is being posted with its permission. The views expressed in this material are solely those of the author and/or New Constructs and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.