by David Aurelio.
The 17Q4 earnings season has arrived and the S&P 500 Earnings Scorecard by Thomson Reuters is where leading institutions and media outlets turn to follow S&P 500 earnings. The daily report is available for free on Thomson Reuters Proprietary Research here. This article will demonstrate some advanced tips on how to fully utilize the data within the report and allow readers to adjust growth rates based on their outlook.
The S&P 500 Earnings Scorecard is the most comprehensive and up to the minute compilation of aggregated earnings growth and market intelligence covering the companies included in the S&P 500 Index. This report combines Thomson Reuters unrivaled historical earnings database, in depth coverage of Wall Street analysts’ bottom-up corporate earnings estimates, and the analytic capabilities of Thomson Reuters Proprietary Research Group and desk-top solutions.
Examples in this article are based on the Jan. 11, 2018 S&P 500 Earnings Scorecard, which can be downloaded here.
Before any adjustments to the Y/Y earnings growth rates can be made, the share-weighted earnings (SWE) for the prior quarter need to be calculated. This example will focus on the current earnings quarter, 17Q4.
To start, pull the aggregated S&P 500 Y/Y earnings growth rate for 17Q4 from “Exhibit 9. Historical/Current/Future Earnings Growth Rates” within the S&P 500 Earnings Scorecard.
Next, pull the 17Q4 SWE from “Exhibit 10. Current/Future Share-Weighted Earnings ($B’s)”, within the S&P 500 Earnings Scorecard.
The 17Q4 Y/Y earnings growth rates from Exhibit 9 and 17Q4 SWE from Exhibit 10 can now be used to calculate the 16Q4 SWE using the following formula:
16Q4 SWE = (17Q4 SWE)/[(17Q4 Y/Y)-1]
For example, the 16Q4 SWE for the S&P 500 = $294.21B/(11.8%+1)=$263.08B
Exhibit A: 16Q4 Share-Weighted Earnings (SWE)
Calculating the prior year SWE opens up the opportunity to understand the influence each sector has on the S&P 500’s Y/Y earnings growth rate and also allows for adjustments to the current expectations. This section will focus on the percentage point (ppt) to the overall index’s Y/Y earnings growth rate.
To start, calculate the difference between the 17Q4 and 16Q4 SWE for each sector. Next calculate the ppt contribution for each sector by dividing the 16Q4 SWE for the S&P 500 and multiplying by 100.
For example, look at the consumer discretionary sector. The difference between 17Q4 and 16Q4 SWE is equal to $1.73B. Dividing the $1.73B difference by $263.08 and multiplying by 100 yields a 0.7 ppt contribution for the sector to the S&P 500’s Y/Y earnings growth rate.
As a side note, the sum of the sector ppt contributions is equal to 11.8 ppt, which matches the 11.8% 17Q4 Y/Y earnings growth rate from Exhibit 9.
Exhibit B: Percentage Point (ppt) Contribution to S&P 500 17Q4 Y/Y Earnings by Sector
The ppt contributions now show the sectors with the largest lift and drag to the S&P 500’s 17Q4 Y/Y earnings. In this example, the information technology sector ‘s 4.0 ppt contribution provides the greatest boost to growth for the index, while the telecommunications services sector’s -0.1 ppt contribution is the largest drag.
The SWE also provides the ability to calculate the ex-sector Y/Y growth rates. By subtracting the sector’s SWE for the quarter from the S&P 500’s SWE, the ex-sector SWE is calculated. The ex-sector SWE’s for each quarter can then be used to calculate the ex-sector growth rates.
17Q4 ex-enegy SWE = $294.12B – $12.27B = $281.94B
16Q4 ex-energy SWE = $263.08B – $5.16B = $257.92B
17Q4 Y/Y earnings ex-enegy = ($281.94B/$257.92B – 1)*100% = 9.3%
As a side note, the value can be verified by looking at the ex-energy Y/Y earnings growth rate for 17Q4 in Exhibit 9.
Exhibit 24 of the S&P 500 Earnings Scorecard shows the current and trailing eight quarter earnings surprise percent history. One adjustment that can be made is to assume that the median surprise over the prior eight quarters (seven quarters for the real estate sectors) will occur in 17Q4.
The table below shows the median surprise over the past eight quarters (T8Q) by sector. These are then applied to the 17Q4 SWE to create the adjusted 17Q4 SWE. Finally, the adjusted 17Q4 and 16Q4 SWE are used to calculate the adjusted 17Q4 Y/Y earnings by sector and for the index.
Exhibit C: Median Earnings Surprise and Adjusted Y/Y Earnings by Sector Example
These adjustments show that if the T8Q median earnings surprise holds this quarter, then the S&P 500 would see 17Q4 Y/Y earnings increase 17.0%, which is 5.2 percentage points above the current expectation of 11.8%.