Street Earnings, as reflected in Zacks Earnings, are marketed as being adjusted to remove unusual income and charges. Our Core Earnings[1] show Street Earnings fail to account for a material amount of unusual income and charges, which distorts investors’ view of profitability across the S&P 500. This report shows:
- the prevalence and magnitude of overstated Street Earnings in the S&P 500,
- that Street Earnings (and GAAP earnings) are flawed and not adjusted as promised, and
- the S&P 500 company with the most overstated Street Earnings and a Very Unattractive Stock Rating.
210 S&P 500 Companies Overstate EPS by More than 10%
For 369 companies in the S&P 500, or 74%, Street Earnings are higher than Core Earnings[2] for the trailing-twelve-months (TTM) ended 2Q24. In the TTM ended 1Q24, 373 companies overstated their earnings.
When Street Earnings are higher than Core Earnings, they are overstated by an average of 19%, per Figure 1.
Figure 1: Street Earnings Overstated by 19% on Average in TTM Through 2Q24[3]
Sources: New Constructs, LLC and company filings.
The 369 companies with overstated Street Earnings make up 66% of the market cap of the S&P 500 as of 8/15/24, which is down from 71% in the TTM through 5/16/24.
Note that this analysis is based on our team analyzing the financial statements and footnotes for ~3,000 10-Ks and 10-Qs filed with the SEC after earnings season. We estimate that the cost of this work for most firms would be over $2 million each quarter. To say the least, there is tremendous value in our rigorous analysis of these filings across so many companies so that our clients can discern the best and worst stocks with unrivaled diligence.
Figure 2: Overstated Street Earnings as % of Market Cap: 2012 through 8/15/24
Sources: New Constructs, LLC and company filings.
For over a third of the S&P 500 (210 companies), Street Earnings are overstated by more than 10% vs. Core Earnings. These 210 companies make up 27% of the market cap of the S&P 500 as of 8/15/24. See Figure 3.
Figure 3: Overstated Street Earnings by > 10% as % of Market Cap: 2012 through 8/15/24
Sources: New Constructs, LLC and company filings.
The Worst Offender in the S&P 500
Figure 4 shows the S&P 500 stock with the most overstated Street Earnings (Street Distortion as a % of Street Earnings per share) over the TTM through 2Q24 and a Very Unattractive Stock Rating. “Street Distortion” equals the difference between Core Earnings per share and Street Earnings per share. Investors using Street Earnings miss the true profitability, or lack thereof, of these businesses.
Figure 4: S&P 500 Companies with Most Overstated Street Earnings: TTM 2Q24
Sources: New Constructs, LLC and company filings.
*Measured as Street Distortion as a percent of Street EPS.
This article was originally published on September 3, 2024.
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt 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 2Q24 10-Q in most cases. Price data as of 8/15/24. QoQ analysis is based on the change since last quarter.
[3] Average overstated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.