After a huge second quarter, analysts expect earnings growth to slow

It’s that time again. Quarterly earnings results will start to flow this Friday, with JPMorgan Chase’s report firing the starting gun on a five-week flurry of profits and losses.

Wall Street analysts expect the third quarter to see something of a slowdown in the rate of profit growth, after earnings per share rose nearly 12% during the second quarter and hit a record.

Wall Street’s hive mind — the consensus of all the estimates produced by sell-side analysts — expects that when all is said and done, companies in the S&P 500 will see an increase of roughly 4% compared to Q3 2023. That level would be a new record for the key measure of profitability.

But if history is any guide, those forecasts will end up undershooting the actual numbers. In fact, going back to 1994, between 60% and 70% of S&P 500 companies typically beat analysts’ forecasts.

Over the past four quarters, that number was closer to 80%, according to the London Stock Exchange Group, which owns earnings database I/B/E/S — once Institutional Brokers’ Estimates System — which began collecting earnings estimates for US companies in 1976.

Why do companies tend to beat forecasts so often? The best paper on the topic, based on surveys and interviews that asked executives about their interactions with analysts, had this to say:

Most CFOs guide analysts to a number that is less than the internal target so as to maximize chances of a positive surprise. In fact, the phrase “managing analysts’ expectations” came up numerous times during the interviews. The rule of thumb that many firms try to follow is to “under-promise and over-deliver.”

So, buckle up for another quarter of overdelivering!