Street earnings, as shown in Zacks Earnings, are advertised as being adjusted to eliminate unusual income and charges. However, Core Earnings reveal that Street Earnings do not account for a significant amount of unusual income and charges, leading to a distorted view of profitability for companies in the S&P 500. This report sheds light on the prevalence and magnitude of overstated Street Earnings within the S&P 500, highlighting the flaws in both Street Earnings and GAAP earnings.
According to the research, 373 companies in the S&P 500, or 75%, have overstated Street Earnings compared to Core Earnings for the trailing twelve months ended in the first quarter of 2024. On average, when Street Earnings exceed Core Earnings, they are overstated by 19%, as shown in Figure 1. This analysis is based on the latest audited financial data, including 10-Q filings for the first quarter of 2024 and price data as of May 16, 2024.
The companies with overstated Street Earnings represent 71% of the market cap of the S&P 500 as of May 16, 2024, up from 70% in the previous quarter. Additionally, over a third of the S&P 500 companies (212) have Street Earnings that are overstated by more than 10% compared to Core Earnings, representing 27% of the market cap of the index. This data, depicted in Figure 2 and Figure 3, emphasizes the extent of the distortion in reported earnings within the S&P 500.
The report also identifies five S&P 500 companies with the most overstated Street Earnings and an unattractive-to-worse Stock Rating. These companies have the highest Street Distortion, which is calculated as the difference between Core Earnings per share and Street Earnings per share. Investors using Street Earnings may be misled about the true profitability or lack thereof of these businesses, as displayed in Figure 4.
The analysis presented in the report is based on a thorough examination of financial statements and footnotes from approximately 3,000 10-Ks and 10-Qs filed with the SEC after earnings season. The findings reveal the discrepancies between Street Earnings and Core Earnings, highlighting the need for investors to look beyond the surface-level earnings figures to gain a more accurate understanding of a company’s financial performance.
Overall, the research underscores the importance of analyzing Core Earnings to get a more realistic picture of a company’s profitability, as Street Earnings may not provide an accurate representation due to the exclusion of significant unusual items. By understanding the discrepancies between Street Earnings and Core Earnings, investors can make more informed decisions when evaluating companies in the S&P 500 and beyond.
