Street earnings overstated for 74% of S&P 500 in 2Q24

One of the greatest strengths of a Robo-Analyst is its ability to scan the entire stock market for the biggest anomalies. Add to that the ability to calculate a proven, superior measure of profits, and I can generate insights that most companies can’t even dream of.

Today I’m presenting the companies with the most overstated earnings in the S&P 500. In short, this report highlights one company with:

1. Most overstated profits and unattractive or worse stock valuations.

As I fold in my fundamental macro research for the 2Q24 earnings period, I see Street earnings are once again distorted across the S&P 500. These results underscore the more stable nature of fundamental earnings.

My firm’s research shows that there is a subset of S&P 500 companies with TTM 2Q24 Street Earnings that are lower than their true earnings, i.e. Core Earnings. These companies are more profitable than investors realize, and in many cases are also undervalued.

Street Earnings, as reflected in Zacks Earnings, are reported as adjusted to remove unusual income and fees. Core Earnings shows that Street Earnings exclude a significant amount of unusual income and fees, which distorts investors’ view of the profitability of the S&P 500 as a whole. This report shows:

• the prevalence and scale of inflated Street profits in the S&P 500,
• that the Street Earnings (and GAAP earnings) are incorrect and have not been adjusted as promised, and
• the S&P 500 company with the most inflated net profits and a very unattractive stock rating.

210 S&P 500 companies overstate earnings per share by more than 10%

For 369 companies in the S&P 500, or 74%, Street Earnings are higher than Core Earnings for the trailing twelve months (TTM) ended in 2Q24. For the TTM ended in 1Q24, 373 companies overstated their earnings. Core Earnings research is based on the latest audited financial data, which in most cases is the 2Q24 10-Q calendar. Price data as of 8/15/24. QoQ analysis is based on the change from last quarter.

When net profits are higher than core profits, they are overstated by an average of 19%, according to Figure 1.

Figure 1: TTM earnings overstated by 19% on average through Q2 2024

The average overstatement percentage is calculated as street distortion, which is the difference between street profits and underlying profits.

The 369 companies whose market earnings have been overstated represent 66% of the S&P 500 Index’s market capitalization as of August 15, 2024, down from 71% in the TTM index through May 16, 2024.

Please note that this analysis is based on analysis of the financial statements and footnotes to approximately 3,000 Forms 10-K and 10-Q filed with the SEC following the earnings season by my firm’s team.

Figure 2: Inflated Street Yields as % of Market Capitalization: 2012 to 08/15/2024

For more than one-third of the S&P 500 (210 companies), Street Earnings are overstated by more than 10% relative to Core Earnings. These 210 companies represent 27% of the S&P 500 market capitalization as of 8/15/24. See Figure 3.

Figure 3: Street Yields Overstated by >10% as % of Market Capitalization: 2012 to 08/15/2024

The worst offender in the S&P 500

Figure 4 shows the S&P 500 stocks with the most overvalued Street Earnings (Street Distortion as % of Street Earnings per share) in the TTM through 2Q24 and a very unattractive stock valuation. “Street Distortion” equals the difference between Core Earnings per share and Street Earnings per share. Street Earnings investors are missing the true profitability, or lack thereof, in these companies.

Figure 4: S&P 500 Companies with the Most Inflated Street Earnings: TTM 2Q24

*Measured as street distortion as a percentage of street net earnings per share.

Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation for writing about a specific genre, style, or topic.