Corporate Earnings as Macro Data
Why Earnings Are Macro Data
Corporate earnings represent the profitability of the business sector—approximately \ trillion annually for S&P 500 companies alone. Aggregate earnings growth provides insight into:
- Economic growth sustainability
- Profit margins and pricing power
- Investment capacity
- Employment trends
The point is: While individual company earnings matter for stock selection, aggregate earnings trends are a macroeconomic indicator rivaling GDP in importance.
S&P 500 Earnings: The Benchmark
S&P 500 operating earnings per share (EPS) is the most widely tracked aggregate earnings measure:
| Period | S&P 500 EPS (Operating) |
|---|---|
| 2019 | \63 |
| 2020 | \36 (pandemic) |
| 2021 | \08 |
| 2022 | \18 |
| 2023 | \21 |
| 2024E | \35-245 |
The calculation: Operating EPS = Sum of Operating Earnings / Divisor (adjusted for index changes)
Why operating vs. GAAP: Operating earnings exclude one-time charges, making them more comparable across periods. GAAP earnings include everything but can be distorted by write-offs.
Earnings and GDP Correlation
Corporate profits as a share of GDP have historically averaged 6-10%:
| Profit Share Level | Interpretation |
|---|---|
| Above 10% | Elevated—may revert lower |
| 8-10% | Normal range |
| Below 8% | Depressed—potential recovery |
The relationship:
- Rising GDP typically → Rising earnings
- Earnings growth often leads GDP at turning points
- Margin compression can break the correlation
Worked example: In 2023, GDP grew 2.5% nominally while S&P 500 earnings grew only 1.4%. Margin compression from wage growth and input costs limited profit expansion.
Earnings Revisions as a Leading Indicator
Changes in analyst earnings estimates provide forward-looking signals:
Revision direction:
- Net upward revisions → Improving fundamentals
- Net downward revisions → Deteriorating fundamentals
Revision breadth: The percentage of estimates being revised up vs. down across all companies
Historical pattern: Aggregate earnings estimate cuts often precede stock market weakness by 1-3 months. Estimate increases often precede market rallies.
Sector Earnings Composition
The S&P 500's earnings mix affects how aggregate earnings track the economy:
| Sector | Approximate Earnings Share | Sensitivity |
|---|---|---|
| Technology | ~28% | Growth-oriented |
| Financials | ~17% | Interest rate sensitive |
| Healthcare | ~12% | Defensive |
| Consumer Discretionary | ~11% | Cyclical |
| Industrials | ~9% | Capex-linked |
| Energy | ~8% | Commodity prices |
| Other | ~15% | Mixed |
The practical insight: Tech and financials together account for ~45% of S&P 500 earnings. Sector-specific trends (AI investment, interest rate changes) can dominate aggregate earnings growth.
Earnings Seasons as Data Releases
Earnings seasons provide concentrated data flow:
| Quarter | Reporting Period | Key Sectors Early |
|---|---|---|
| Q1 | Mid-April to mid-May | Banks, tech |
| Q2 | Mid-July to mid-August | Banks, industrials |
| Q3 | Mid-October to mid-November | Banks, consumer |
| Q4 | Mid-January to mid-February | Banks, healthcare |
The beat rate: Historically, approximately 70-75% of companies beat earnings estimates. This systematic upward bias reflects analysts' incentive structures.
The practical point: Focus on the magnitude of beats/misses and guidance changes, not just whether companies beat.
Profit Margins as a Macro Indicator
Aggregate profit margins capture pricing power and cost pressures:
The calculation: Net Profit Margin = Net Income / Revenue
S&P 500 net margin history:
- Pre-pandemic: approximately 11%
- 2021 peak: approximately 13%
- 2023-2024: approximately 11-12%
Margin drivers:
- Wage growth (pressure)
- Input costs (variable)
- Pricing power (relief)
- Productivity gains (relief)
The durable lesson: Margin compression during tight labor markets limits earnings growth even when revenues expand. Watch unit labor costs for margin pressure signals.
Corporate Guidance and Macro Signals
Forward guidance from earnings calls provides real-time economic intelligence:
What to monitor:
- CFO commentary on demand trends
- Order backlog changes
- Inventory management
- Capital spending plans
- Hiring intentions
The practical point: Aggregate the guidance—when 60%+ of industrials cite slowing orders, it signals broader economic weakening before it shows in official data.
Common Pitfalls
- Focusing on individual companies: Aggregate trends matter more for macro
- Ignoring buyback effects: Share repurchases boost EPS without earnings growth
- Missing sector distortions: Energy swings can dominate aggregate changes
- Confusing earnings growth with economic growth: Margins and mix effects matter
Earnings and the Stock Market
The S&P 500's long-term returns come from:
- Earnings growth (typically 5-7% annually)
- Dividend yield (typically 2%)
- Multiple expansion/contraction (variable)
The implication: Earnings growth sets the fundamental return floor. Multiple changes determine short-term returns around that trend.
National Income Accounts vs. S&P 500
The BEA publishes corporate profits as part of GDP:
| Measure | Coverage | Timeliness |
|---|---|---|
| S&P 500 earnings | Large public companies | Real-time (quarterly) |
| NIPA corporate profits | All corporations | ~2 month lag |
When they diverge: S&P 500 is weighted toward tech giants and multinationals. NIPA includes small businesses and domestic-focused firms. In a two-speed economy, the measures can tell different stories.
Checklist for Earnings Season
Before earnings season:
- Note consensus EPS growth expectations for the quarter
- Identify sectors expected to lead/lag
- Track pre-announcements for early signals
During earnings season:
- Monitor beat rate and magnitude
- Track guidance revisions
- Note sector-level themes from management commentary
After earnings season:
- Calculate actual vs. expected growth
- Assess margin trends
- Update full-year earnings estimates
Next Step
Track the S&P 500 forward 12-month EPS estimate weekly for one quarter. Note how the estimate changes during earnings season vs. between seasons. This exercise reveals how analyst expectations evolve and provides context for interpreting earnings-related market moves.