S&P 500 Earnings Growth: Behind the Expectations

by: Sam Ro, CFA

How could analysts expect S&P 500 earnings to grow from $49 in 2008 to $55 in 2009 and to $74 in 2010? One explanation is turnover on the index.

Let's consider the impact of General Motors (GMGMQ.PK). According to data compiled by S&P's Howard Silverblatt on June 2, the S&P 500's consumer discretionary sector earnings were expected to fall 75.6% year-over-year in Q2. This was due to the massive loss estimated for GM.

But now that GM has been removed from the S&P 500, Q2 consumer discretionary earnings are expected to jump 36.6% year-over-year. It's clear how changing a constituent can have a material impact on the index's earnings estimates and valuations.

And GM isn't the only money loser that got booted from the index in the last year or so. Lehman Brothers (OTC:LEHMQ), Freddie Mac (FRE), and Fannie Mae (FNM) bled money for the S&P 500 in 2008, but they're not in the index today.

This could at least partially explain the expectation for 300% year-over-year earnings growth in the S&P 500's financials sector in Q2.