S&P 500 Earnings Growth: The Borrowed-Time Earnings Season
Updated: Nov 2
Third-quarter earnings season is under way, and S&P 500 earnings growth looks spectacular. As of FactSet's October 30 update, with 60% of S&P 500 companies reporting, earnings are on track to grow 30.2% from a year ago, and all eleven sectors are up. That figure blends reported results that are in the books along with analysts' estimates for companies yet to report. If it holds, it will be the third straight quarter of growth above 25%. The key part comes when you ask where the growth is expected to actually come from.
Unfortunately, much of it is not the ordinary, repeatable kind. By our estimate, about 9 of the 30.2 percentage points come from two sources that are unlikely to repeat themselves: Energy, whose profits rise and fall with oil prices and refining margins (what refiners earn between the cost of crude and the price of fuel), and easy comparisons with a year-ago quarter in which two large companies took sizable one-time charges. Another 13 or so points come from a single industry, semiconductors. Set aside Energy and those two companies, and growth is closer to 21%. Set aside the chipmakers as well, and the rest of the index is expected to grow about 9%. That is still healthy and pretty normal, but far from the 30.2% glowing in gold on the chart.
Where S&P 500 Earnings Growth Is Expected to Come From
Three sources are expected to account for most of the growth. Energy earnings are on track to more than double, up 146%. Oil averaged about $86 a barrel in the third quarter, 32% more than a year earlier, and refiners' earnings are on track to rise about sixfold. Semiconductor companies are predicted to grow earnings about 130% on heavy spending on artificial intelligence (AI) data centers. Two communication-services companies, Meta Platforms and EchoStar, are being measured against a year-ago quarter when each took a large one-time charge: a $15.9 billion tax charge at Meta and a $16.5 billion asset write-down (a cut in the recorded value of its wireless network) at EchoStar. Their flattering growth comes from that easy one off charge, not from their businesses suddenly earning a lot more, unfortunately.
The sector table above shows the concentration of growth pretty clearly. Energy and Information Technology lead the list, and each owes much of that position to one of the three sources listed at the bottom. FactSet estimates that without chipmakers, Information Technology growth falls from 68% to about 27%. Communication Services dropped to about 21% from about 40% a week earlier after Alphabet missed estimates, and by our estimate its earnings would be down about 5% without Meta and EchoStar. At the other end of the table, Financials, Health Care, Consumer Staples, and Consumer Discretionary are each growing at a middling pace (more in line with GDP growth rates) of 3% to 6%.
Semiconductors themselves deserve separate attention. Their growth reflects heavy capex spending by companies building AI capacity, not a one-time accounting effect. But it is concentrated in one industry tied to one gigantic capex spending cycle (and chip cycles have a long history of sharp swings ending in bankruptcy). That risk differs from an oil spike, but it is another legit reason not to treat the headline as a measure of how the typical company is doing.
Why It Matters
Investors value a stock as a multiple of its earnings, meaning the dollars of share price paid for each dollar of annual profit per share. All else equal, profits that repeat earn a higher multiple than profit lifted by an event like a one-time commodity swing. Sample size matters. And growth rates need the same scrutiny. Growth is measured against the same quarter a year earlier, so if that quarter was dragged down by a one-time charge, this year's growth mistakenly looks far stronger than the business really is. Meta is the clearest example of this: a $15.9 billion tax charge cut its year-ago earnings to $1.05 a share, against the $7.25 it would have earned without the charge. Meta has now reported $3.83 a share, which itself absorbed a $9.9 billion litigation charge. That works out to growth of about 265%. Excluding both charges, Meta says it would have earned $7.40, up only about 2%! The oil boost and last year's charges also make next year harder. When oil prices or refining margins cool, or the year-ago quarter no longer carries a one-time charge, growth has a higher baseline to beat. Analysts already expect some of this. FactSet consensus has growth slowing to about 3% by the second quarter of 2027, when this year's unusually strong second quarter, swollen by investment gains at Alphabet and Amazon, becomes the new comparison point.
And valuations offer only partial comfort. The S&P 500's forward price-to-earnings ratio, which is price divided by the next twelve months of expected earnings per share, has slipped to 18.7, from 20.4 at the end of June and 19.0 at the end of September, because earnings estimates have risen faster than prices. That is a little below its 5-year (19.8) and 10-year (19.1) averages. But the measure depends on the same strong estimates in question. Based on the past twelve months of actual reported earnings, the ratio comes in at 25.9, disturbingly above its 5-year (24.4) and 10-year (23.7) averages.
One simple reality check is to look at the gap between earnings growth and revenue growth. Revenue is generally harder to dress up with lipstick. It grew about 11.1% in the first quarter, based on FactSet's early-May figure when most companies had reported, and 15.6% in the second. Blended figures have it growing 13.4% in the third. Earnings grew much faster in the first two quarters and are on track to do so again. The second quarter shows what can widen that gap. Reported growth of 52% included large investment gains: about $98 billion at Alphabet from an unrealized gain on stocks it holds, and $53 billion at Amazon, mainly from its investments in Anthropic. Neither came from actually selling more to customers. On FactSet's August 7 figures, excluding those two companies cut second-quarter growth from 50.4% to 32.0%. Analysts typically do not try to forecast gains like these, so third-quarter estimates are unlikely to include them. Positive numbers can also work in reverse: on October 28, Alphabet reported an $8.7 billion third-quarter loss on stocks it holds, mainly its stake in SpaceX, according to the company's earnings call. Its earnings of $2.12 a share missed analysts' $3.02 estimate by about 30%, and the loss accounted for $0.55 of that $0.90 shortfall. Either way, reported results can land far from estimates for reasons unrelated to the underlying business. One-time items also help explain why FactSet's October 30 update has the Magnificent 7 growing earnings more slowly than the other 493 S&P 500 companies, 22.6% against 32.6% (with Apple and Nvidia still to report). If these estimates hold, this would be the first time since the fourth quarter of 2022 that the Mag Seven have come in second to the rest of the S&P 500.
What It Means for Portfolios
None of this argues for selling into earnings season. It argues for reading the results the way an analyst would. When a company reports earnings above analyst expectations, the question is how much of that surprise will repeat vs. how much derives from one off events and accounting magic. All else equal, investors generally place more value on repeatable operating profit than on a gain from an investment stake, a favorable comparison, or a commodity swing. But it can take the market some time to tell them apart. And it's important to understand that it's not a great idea to chase the names with the biggest reported growth without understanding whether that growth originates in genuine increased sales or an accounting lift from last year's one-time charges.
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