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]
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
Sources: New Constructs, LLC and company filings.
Click here to read the full article.
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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.
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[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::
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