An Extremely Unusual Year for the Market

Key Concepts

• Earnings Estimates
• Earnings Revisions (Upside)
• Beat Rates
• Beat Amounts
• S&P 500 Earnings
• V-Shape Recovery (in earnings estimates)

Unusual Earnings Performance in 2023

The current year has presented an unusual trend in earnings estimates for fiscal years 2025 and 2026. Initially, for the first half of the year, these estimates were revised downwards. However, a significant shift occurred between May and July, with estimates beginning to rise. This upward revision is attributed to companies consistently exceeding earnings expectations by substantial margins each quarter.

Drivers of Estimate Revisions

The primary driver for the upward revision of earnings estimates is the exceptional performance of companies, characterized by:

• High Margins: Companies are demonstrating robust profitability, contributing to their ability to surpass expectations.
• Earnings Revisions to the Upside: Analysts and the market ("the street") are being compelled to increase their earnings forecasts due to consistent positive surprises.

Magnitude of Earnings Beats

The transcript highlights that the current year's earnings beats have been "way above average" in terms of both frequency (beat rates) and the magnitude of the surprise (beat amounts). This sustained outperformance has forced analysts to adjust their models. As the speaker notes, "the street is saying, 'Okay, screw it. I've got to start raising my numbers. I don't usually do this, but I have to. Otherwise, I look stupid because my company just beat by 10% every quarter for three quarters.'" This indicates a strong market consensus shift driven by undeniable company results.

Historical Context and S&P 500 Earnings Trends

To emphasize the unusual nature of this trend, the transcript provides historical context for S&P 500 earnings. Typically, over a ten-year period, the actual year-end earnings for the S&P 500 tend to be within approximately 5% of the initial estimates made at the start of the year. The current situation, described as a "slow V-shape" in earnings estimates, deviates significantly from this historical pattern of more stable, predictable year-end outcomes. This suggests a more dynamic and surprising earnings environment than is usually observed.

Conclusion

The current year's earnings performance is marked by an unprecedented upward revision of estimates for future fiscal years (2025-2026). This phenomenon is driven by companies consistently exceeding expectations with significant beat rates and beat amounts, leading to a forced adjustment by market analysts. This trend represents a departure from historical S&P 500 earnings patterns, which typically show less volatility between initial estimates and year-end actuals.