S&P 500 Will Likely Report Year-Over-Year Decline in Earnings in Q3(Oct 7, 2019)

박재훈투영인

created At: 2/20/2025

Sell

This analysis includes a sell recommendation. Please carefully review all mentioned risk before proceeding.

Fact

The S&P 500 was expected to report a -4.1% earnings decline in Q3. Historically, 72% of companies beat EPS estimates, improving growth rates by 3.7 percentage points on average. Applying this trend reduces the expected decline to -0.1%. If Q3 ends negative, it marks the first three consecutive quarters of earnings declines since 2015-2016.

Opinion

While initial projections suggest a -4.1% decline, historical patterns of positive earnings surprises make it more likely the actual decline will be closer to -0.1% or even flat. However, the potential for three consecutive quarters of negative earnings signals underlying corporate challenges. Persistent declines could raise concerns about slowing economic growth, despite market resilience.

Core Sell Point

Though initial estimates project a notable Q3 earnings decline, historical trends suggest the final figure will likely be closer to flat, but ongoing earnings weakness raises broader market concerns.

As of October 4, the S&P 500 is expected to report a decline in earnings of -4.1% for the third quarter. What is the likelihood the index will report an actual decline in earnings of -4.1% for the quarter?

Based on the average change in earnings growth due to companies reporting positive earnings surprises during each earnings season, it is likely the index will report a slight year-over-year decline in earnings in Q3.

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 4.9%. 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 five years) due to the number and magnitude of positive earnings surprises.

If this average increase is applied to the estimated earnings decline at the end of Q3 (September 30) of -3.8%, the actual earnings decline for the quarter would be -0.1% (-3.8% + 3.7% = -0.1%).

If the index does report a year-over-year decline in earnings in Q3, it will mark the first time the index has reported three straight quarters of year-over-year earnings declines since Q4 2015 through Q2 2016.

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