At a time of year when all players in the financial markets are looking ahead to the next year, optimism is prevailing. AI should remain a supportive theme, the Fed should cut rates twice more, and the US economy should benefit from the tax-reduction plan passed by Congress this summer.
A supportive backdrop that enables analysts to forecast 14.5% EPS growth in 2026 for S&P 500 companies.
Is this too optimistic? Historically, yes. According to FactSet, at the end of the year (December 31), on average EPS is 6.2% lower than forecasts at the start of a year. FactSet's study covers 2000-2024.
Source: FactSet
This gap may seem large, although not tjat much once you remove four exceptional years, when events that were hard for analysts to predict affected results: 2001 (September 11), 2008 and 2009 (financial crisis), and 2020 (the Covid pandemic).
When those four years are excluded, the difference is just 0.9%; analysts are therefore quite accurate in their predictions.
Even though the gap is small, it is still a rather counterintuitive result. Because if you follow markets a bit, you are used to seeing every three months earnings seasons, especially in the United States, where we say results are better than expected, with roughly 80% of companies beating estimates.
What explains this is that analysts reduce quarterly results estimates over the quarter. It is always a bit of a game in which companies guide expectations lower to deliver pleasant surprises when they are reported.
This dynamic explains why expectations are a bit too high at the start of a year, although are systematically beaten in quarterly reportings.
Beyond this relative game, what matters is the EPS growth actually delivered by companies. Over the long term, indices are correlated with the progression of earnings per share.
