Picking out the one stock most likely to miss the Street’s estimates for next quarter’s earnings is something one can only do with a superior earnings measure of the entire market. Without proprietary footnotes data, other analysts are flying blind. They are forced to estimate earnings without the full picture of a company’s financials, including the material information hidden in footnotes.
Every quarter, my team combs through thousands of footnotes to help find the one stock I think is most likely to miss the Street. I think this stock will miss because Street Earnings are artificially increased by non-operating income that I remove when I calculate Core Earnings.
You probably won’t be surprised to learn that Street Earnings overstate profits for the majority of S&P 500 companies. In this report, the second of my two earnings season preview reports, I show:
- the frequency and magnitude of overstated Street Earnings in the S&P 500 and
- the S&P 500 company most likely to miss 3Q24 earnings.
The Robo-Analyst technology allows me to compare Core Earnings to Street Earnings across the entire market.
Street EPS Are Higher Than Core EPS for 369 S&P 500 Companies
For 369 companies in the S&P 500, or 74%, Street Earnings are higher than Core Earnings in the trailing twelve months (TTM) ended 2Q24. In the TTM ended 1Q24, Street Earnings were overstated for 373 companies.
The more interesting trend, however, is in the percentage of the S&P 500 where Street Earnings overstate Core Earnings by more than 10%. That number equals 42% (210 companies), which is slightly lower the 212 companies in the TTM ended 1Q24.
Those 210 companies make up 26.9% of the market cap of the S&P 500 as of 9/23/24, which is down from 27.4% of the market cap in 1Q24, measured with TTM data in each quarter. See Figure 1.
Figure 1: Overstated Street Earnings by >10% as % of Market Cap: 2012 through 9/23/24
The 369 companies with overstated (by any amount) Street Earnings make up 66% of the market cap of the S&P 500 as of 9/23/24, which is down from 71% in 1Q24, measured with TTM data in each quarter.
Figure 2: Overstated Street Earnings as % of Market Cap: 2012 through 9/23/24
Note that this analysis is based on my team analyzing the financial statements and footnotes for ~3,000 10-Ks and 10-Qs filed with the SEC after earnings season. I estimate that the cost of this work for most firms would be over $2 million each quarter.
When Street Earnings are higher than Core Earnings, they are overstated by an average of 19%, per Figure 3.
Figure 3: Street Earnings Overstated by 19% on Average in TTM Through 2Q24
S&P 500 Company Likely to Miss 3Q24 Earnings
Figure 4 shows S&P 500 company likely to miss calendar 3Q24 earnings because their Street EPS estimates are overstated. Because investors and analysts tend to anchor their earnings projections to historical results, errors in historical Street EPS lead to errors in Street EPS estimates.
Figure 4: S&P 500 Company Likely to Miss 3Q24 EPS Estimates
*Assumes Street Distortion as a percent of Core EPS is the same for 3Q24 EPS as for TTM ended 2Q24.
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.