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S&P 500 – How Did 2022 Earnings Do?

By March 16, 2023Blog

It is well known that analysts often miss the mark when it comes to estimating future earnings. Now that 2022 is well behind us, we can look back over the year and see how earnings have done.

Earnings for 2022 are estimated to be $173 per index share, a decrease of 13% from 2021. On a normalised basis – which attempts to strip out once-off exceptionals – earnings have declined by 5% to $197.

What is perhaps most remarkable is how analysts’ earnings estimates have evolved over 2022. The chart above shows this clearly. It shows what analysts expected 2022 earnings to be at a particular point in time (we use normalised earnings as the analysis isn’t available for GAAP, or standard, earnings).

For example, in the fourth quarter of 2021, analysts thought that 2022 earnings per index share would be $220. This estimate actually rose to $225 by the first quarter of 2022 (even with markets declining). By the fourth quarter of 2022, just before fourth-quarter earnings were reported, this figure declined to $200. Even that figure wasn’t quite right – actual normalised earnings for 2022 were $197.

In other words, analysts’ early estimates – which they revised upwards during the year! – were off by 11%. Many practitioners – ourselves included – quote earnings estimates and value assets using them. For example, this time last year we would have been saying something along the lines of: “the S&P 500 trades on a forward price-to-earnings ratio of 21.6 based on 2022 earnings estimates,” when in reality that ratio should have been 24.3.

What exactly is the point of doing that when the future is so difficult to predict? And why does the investment industry pour so much time, energy and resources into predicting the future when the track record of doing is littered with an embarrassment of errors? The problem, in our view, is not that earnings estimates are inaccurate (a fact most investors and analysts are aware of), but rather that investors act as if they are 100% accurate.

Current estimates for 2023 earnings are c. $201 per index share, an increase of 16% over 2022 levels. We’ll see how that estimate evolves over the next year, but count us as being in the sceptical party given analysts’ track record of predictions!