The more relevant measure for investors of earnings for individual stocks is expected operating earnings
. That is earnings excluding non-recurring, extraordinary items in the profit and loss account and contributions from discontinued operations that will not be part of future earnings.
Companies choose to exclude far more negative extraordinary items than positive, leading some to describe operating earnings as “earnings before whatever went wrong.” In 2001 and 2002, the market’s operating earnings – using the S&P 500 index companies as our proxy – exceeded reported profits by 57 per cent and 70 per cent, respectively. In 2008, the difference was 233 per cent and in 2020, it was 30 per cent.
Near the middle of this year, all companies in the S&P 500 will have published their 2022 financial statements. By then, aggregate as reported earnings will probably fall below today’s estimate. So, S&P reports the aggregate of analysts’ estimates of operating earnings for 2023 at US$226, 13 per cent growth over 2022. That translates into a current market forward P/E multiple for the S&P 500 of 17 times.
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