This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Core Earnings Are a Better & Less Volatile Measure of Earnings

New Constructs

New Constructs
Visit: New Constructs


Investment Analyst

This report is an abridged and free version of S&P 500 & Sectors: Core Earnings Vs. GAAP Earnings Through 2Q21, one of the reports in our quarterly series on fundamental market and sector trends, which is available to Pro and higher members. More free reports are available here

The full version of the report analyzes the Core Earnings[1] and GAAP earnings of the S&P 500 and each of its sectors (last quarter’s analysis is here). The most recent Core Earnings and GAAP Earnings values are based on the latest audited financial data, which is the calendar 2Q21 10-Q for most companies.

These reports leverage more reliable fundamental data[2] that overcomes flaws with legacy fundamental datasets. Our research provides a more informed view of the fundamentals and valuations of companies and sectors. Our Earnings Distortion research has been shown to generate idiosyncratic alpha.

Core Earnings Are Better than GAAP Earnings

Figure 1 shows Core Earnings provide a less volatile measure of earnings than GAAP earnings. For instance:

  • GAAP earnings fell 30% YoY in 2020 while Core Earnings, which adjust for unusual gains/losses, fell just 18% YoY.
  • On the flip side, GAAP earnings rose 65% since the end of 2020, while Core Earnings rose only 34% over the same time.

In other words, corporate profits were not as bad, nor has the rebound been as robust, as GAAP earnings led investors to believe during the COVID crisis.

Figure 1: S&P 500 Core Earnings Vs. GAAP: 4Q20 – 2Q21

S&P 500 Core Earnings Vs. GAAP: 4Q20 – 2Q21

Sources: New Constructs, LLC and company filings. 
Our Core Earnings analysis is based on aggregated TTM data for the sector constituents in each measurement period. The August 18, 2021 measurement period incorporates the financial data from calendar 2Q21 10-Qs, as this is the earliest date for which all the calendar 2Q21 10-Qs for the S&P 500 constituents were available.

We warned investors to expect an overstated rebound in GAAP earnings in our 1Q21 All Cap Core Earnings vs. GAAP Earnings analysis, where we noted:

“depressed GAAP earnings throughout 2020, largely due to record write-downs, means companies are set up for record YoY comps and growth in 2021. Accordingly, investors should take the reported earnings growth in 2021 with a grain of salt.”

Key Details on Select S&P 500 Sectors

Within the S&P 500, all but two sectors saw a year-over-year (YoY) rise in Core Earnings in 2Q21. This improvement in Core Earnings is more widespread than last quarter, when four sectors saw a YoY decline in Core Earnings.

The Financials sector saw the largest % YoY improvement in Core Earnings, which rose from $196 billion in 2Q20 to $311 billion in 2Q21.

The Technology sector generates the most Core Earnings of any sector and grew Core Earnings by 38% YoY in 2Q21. On the flip side, the Energy sector has the lowest Core Earnings and the Industrials sector had the largest YoY drop in 2Q21. Below we highlight the Consumer Cyclicals sector and a stock with some of the most Earnings Distortion in the sector.

Sample Sector Analysis[3]: Consumer Cyclicals Sector

Figure 2 shows Core Earnings for the Consumer Cyclicals sector rose 38% YoY in 2Q21, while GAAP earnings rose 75% over the same time. The COVID-19 pandemic impacted the Consumer Cyclicals sector Core Earnings more than the Financial Crisis when Core Earnings were largely unchanged.

Figure 2 also highlights how GAAP Earnings overstated the Consumer Cyclicals sector’s decline in profits during 2020 when compared to Core Earnings. GAAP Earnings fell 51% from 4Q19 to 4Q20, while Core Earnings fell 37% over the same time.

Figure 2: Consumer Cyclicals Core Earnings Vs. GAAP: 2004 – 2Q21

Consumer Cyclicals Core Earnings Vs. GAAP: 2004 – 2Q21

Sources: New Constructs, LLC and company filings. 
Our Core Earnings analysis is based on aggregated TTM data for the sector constituents in each measurement period. The August 18, 2021 measurement period incorporates the financial data from calendar 2Q21 10-Qs, as this is the earliest date for which all the calendar 2Q21 10-Qs for the S&P 500 constituents were available.

Core Earnings Distortion Details: Lowe’s Companies (LOW)

Below, we detail the hidden and reported unusual items that aren’t captured in GAAP Earnings that are captured in Core Earnings for Lowe’s Companies (LOW), a stock with some of the most Earnings Distortion in the Consumer Cyclicals sector. After adjusting for these items, we find that Lowe’s Core Earnings of $10.24/per share are greater than reported GAAP Earnings of $9.16/per share. Lowe’s Earnings Distortion Score is Beat. Our stock rating for LOW is Attractive.

Figure 3 details the differences between Core Earnings and GAAP Earnings so readers can audit our research.

Figure 3: Lowe’s GAAP Earnings to Core Earnings ReconciliationTTM through Calendar 2Q21

Lowe’s GAAP Earnings to Core Earnings Reconciliation: TTM through Calendar 2Q21

Sources:  New Constructs, LLC and company filings.

More details:

Hidden Unusual Expenses, Net = -$133 million or -$0.18/per share

Reported Unusual Expenses Pre-Tax, Net = $-1.1 billion or -$1.43/per share

Reported Unusual Expenses After-Tax, Net = -$29 million or -$0.04/per share

Tax Distortion = $424 million or $0.57/per share

  • We remove the tax impact of unusual items on reported taxes when we calculate Core Earnings. It is important that taxes get adjusted so they are appropriate for adjusted pre-tax earnings.

This article originally published on August 25, 2021.

Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

Follow us on TwitterFacebookLinkedIn, and StockTwits for real-time alerts on all our research.

Appendix: Calculation Methodology

We derive the Core Earnings and GAAP Earnings metrics above by summing the Trailing Twelve Month individual S&P 500 constituent values for Core Earnings and GAAP Earnings in each sector for each measurement period. We call this approach the “Aggregate” methodology.

The Aggregate methodology provides a straightforward look at the entire sector, regardless of market cap or index weighting and matches how S&P Global (SPGI) calculates metrics for the S&P 500.

[1] Only Core Earnings enable investors to overcome the inaccuracies, omissions and biases in legacy fundamental data and research, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and forthcoming in The Journal of Financial Economics.

[2] Three independent studies provide insights into our data, models, and ratings. Learn more here.

[3] The full version of this report provides analysis for every sector like what we show for this sector.

[4] Each of the below items was found only in the 10-K, so to calculate TTM values, we assume the charges were spread evenly throughout the four quarters in 2020.

Click here to download a PDF of this report.

Disclosure: New Constructs

Disclosure: David Trainer, Kyle Guske II, Sam McBride, Matt Shuler, Alex Sword, and Andrew Gallagher receive no compensation to write about any specific stock, style, or theme.

About New Constructs

New Constructs leverages cutting-edge Robo-Analyst technology to provide insights and diligence on stocks, ETFs, mutual funds & debt issuers. Highly-respected public and private institutions believe in our concepts::

– Fundamental data and earnings: Core Earnings: New Data and Evidence

– Models for NOPAT, Invested Capital and Return on Invested Capital (ROIC): Getting ROIC Right

– Stock ratings: Robot Analysts Outwit Humans on Investment Picks

The information and opinions presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or solicitation of an offer to buy or sell securities or other financial instruments. New Constructs has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor and nothing in this report constitutes investment, legal, accounting or tax advice. This report includes general information that does not take into account your individual circumstance, financial situation or needs, nor does it represent a personal recommendation to you. The investments or services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about any such investments or investment services.

Information and opinions presented in this report have been obtained or derived from sources believed by New Constructs to be reliable, but New Constructs makes no representation as to their accuracy, authority, usefulness, reliability, timeliness or completeness. New Constructs accepts no liability for loss arising from the use of the information presented in this report, and New Constructs makes no warranty as to results that may be obtained from the information presented in this report. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information and opinions contained in this report reflect a judgment at its original date of publication by New Constructs and are subject to change without notice. New Constructs may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and New Constructs is under no obligation to insure that such other reports are brought to the attention of any recipient of this report.

New Constructs’ reports are intended for distribution to its professional and institutional investor customers. Recipients who are not professionals or institutional investor customers of New Constructs should seek the advice of their independent financial advisor prior to making any investment decision or for any necessary explanation of its contents.

In-depth risk/reward analysis underpins our stock rating. Our stock rating methodology grades every stock according to what we believe are the 5 most important criteria for assessing the quality of a stock. Each grade reflects the balance of potential risk and reward of buying that stock. Our analysis results in the 5 ratings described below. Very Attractive and Attractive correspond to a “Buy” rating, Very Unattractive and Unattractive correspond to a “Sell” rating, while Neutral corresponds to a “Hold” rating.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from New Constructs and is being posted with permission from New Constructs. The views expressed in this material are solely those of the author and/or New Constructs and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Tax-Related Items (Circular 230 Notice)

The information in this material is provided for informational purposes only and does not constitute tax advice and cannot be used by the recipient or any other taxpayer to avoid penalties under any federal, state, local or other tax statutes or regulations, or to resolve any tax issue.

trading top