US Earnings Season: What Does Wall Street Expect from S&P 500 Companies?
Overview
The second-quarter earnings season is commencing with a highly optimistic investor sentiment. Analysts are projecting a year-over-year earnings growth of 23.6% for S&P 500 companies, a significant increase from the 18.8% growth forecasted at the end of March.
Positive Earnings Surprises
Early reports indicate a trend of positive earnings surprises. So far, only 4% of S&P 500 companies have reported their results, yet 89% have surpassed EPS estimates, and 72% have exceeded revenue expectations. Despite the S&P 500 index trading at a forward P/E ratio of 20.5, which is above its historical averages, investors remain confident that a strong earnings season could validate current valuations.
Historical Context
Historically, analysts tend to underestimate the earnings potential of S&P 500 companies. The current consensus of 23.6% year-over-year earnings growth would mark the second consecutive quarter with growth above 20%. If the historical trend of positive surprises continues, actual earnings growth could exceed 29%, reaching levels not seen since Q4 2021.
In 37 of the last 40 quarters, the final earnings growth rate has surpassed initial estimates. Over the past decade, S&P 500 companies have beaten EPS estimates by an average of 7.4%, with approximately 76% of companies reporting earnings above consensus expectations. These positive surprises have historically boosted the overall earnings growth rate by an average of 6.2 percentage points during the reporting season.
Current Expectations
Based on historical averages, Q2 earnings growth could rise from 23.2% to around 29.4%. Recent data suggests even greater potential, with estimates indicating earnings growth could reach approximately 29.6% to 31.7% based on the last five and four quarters, respectively. Even the most conservative estimates predict earnings growth above 29% year-over-year.
Investor Focus
The initial earnings reports have already increased the expected earnings growth rate for the S&P 500 from 23.2% to 23.6%. If this trend of positive surprises continues, final earnings growth could approach or exceed 30%. Investors are particularly interested in management guidance for the second half of the year, especially regarding AI-related capital spending, cost pressures, and the impact of rising energy prices.
A robust earnings season could provide a fundamental justification for current Wall Street valuations, particularly in sectors such as technology, semiconductors, and AI infrastructure companies.