Regardless Next Year’s Elevated Earnings Expectations Come Through Or Not, Gap Between GAAP And Non-GAAP Persists

Even if next year’s estimates are realized, there is not going to be much improvement in a trend that has plagued US corporate earnings for a while. Over the years, the gap between GAAP and non-GAAP earnings is getting starker. Both are important in their own right. It is very possible non-GAAP tends to overstate earnings, while GAAP does the opposite. On balance, the lesser the discrepancy between the two the higher the quality of earnings.

In this respect, S&P 500 companies this year are expected to realize $93.36 in reported earnings. The $27.45 gap with operating earnings is the widest ever since 2008. During recessions, GAAP earnings collapse as companies take asset write-downs, etc. That said, although the economy is expected to grow in the four to five percent range, the gap between GAAP and non-GAAP next year is only expected to narrow to $23.63 (Chart 4).

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