Analysts Are Raising Earnings Estimates Following Second-Quarter Beats

Second-quarter 2023 earnings season exceeded expectations by the highest margin in nearly two years.

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Second-quarter earnings season exceeded expectations by the highest margin in nearly two years. Refinitiv calculates that 79.0% of the 472 S&P 500 index companies that have reported as of mid-August have topped expectations. This was the highest beat rate since the third quarter of 2021. The average beat rate since 1994 is 66%.

Accompanying the beats is a larger magnitude of surprises. S&P 500 companies have exceeded analysts’ expectations in aggregate by 7.8%, according to Refinitiv. This is the highest surprise factor since the third quarter of 2021. It is also far above the long-term average of earnings topping estimates by a magnitude of 4.1% and the 4.2% average surprise of the previous four quarters.

Earnings surprises are determined by how reported earnings compare to the consensus estimate. The consensus estimate is the average of all earnings estimates made available to data aggregators such as Refinitiv by analysts. The number of estimates varies by company. Meta Platforms Inc. (META), formerly Facebook, has 56 analysts providing full-year 2023 earnings estimates. Fellow S&P 500 member Verisign Inc. (VRSN) has four analysts providing full-year earnings forecasts.

Many investors pay attention to how earnings estimates are revised over time. Positive (upward) earnings estimate revisions can lead to outperforming stock prices. Negative (downward) earnings estimate revisions can lead to underperforming stock prices. This effect is reflected in the performance of the AAII Stock Screens. The Estimate Revisions Up 5% screen and the Estimate Revisions Top 30 Up screen are among our best-performing screens since inception (1998). The Estimate Revisions Down 5% screen and the Estimate Revisions Lowest 30 Down screen are among our worst-performing screens since inception.

At the aggregate level, earnings estimate revisions provide insight into whether analysts think future earnings will be better or worse than previously expected. The table below shows that analysts believe full-year 2023 earnings growth for most S&P 500 sectors will be stronger than what they expected in the spring, but less than they expected at the start of the year.

Keep in mind that the further out analysts forecast, the less accurate their estimates become. This is due to ever-evolving economic and business environments. So, while analysts currently think earnings growth will rebound to 11.8% in 2024, the forecast is very much subject to change.