At the beginning of each new year, many analysts make predictions regarding the year-end price and earnings of the S&P 500 index. For 2013, the bottom-up EPS estimate (which reflects an aggregation of the EPS estimates for all 500 companies in the index) on December 31 was $113.11. However, what is the likelihood that $113.11 will be the final EPS value for the S&P 500 in 2013? How accurate is the bottom-up EPS estimate one year in advance?
Over the past 15 years, the average difference between the bottom-up EPS estimate one year prior to the end of that year and the final EPS number for that year has been +10.3%. In other words, analysts on average have overestimated the final EPS number by about 10% one year in advance. Analysts overestimated the final value (i.e. the final value finished below the estimate) in ten of the fifteen years and underestimated the final value (i.e. the final value finished above the estimate) in the other five years. For the purposes of this analysis, the final EPS number for a year is the EPS number recorded three months after the end of each calendar year (March 31) to capture the actual annual EPS results reported by most companies during the fourth quarter earnings season (January through March).
However, this 10.3% average includes three years in which there were substantial differences between the bottom-up EPS estimate at the start of the year and the final EPS number: 2001 (+35.9%), 2008 (+53.4%), and 2009 (+27.4%). Using the median instead of the average, the median difference between the bottom-up EPS estimate one year prior to the end of that year and the final EPS number for that year has only been +5.5% over the past 15 years.
The estimated earnings growth rate for Q4 2012 is 2.4% this week, slightly below last week’s estimate of 2.7%. The decline in the growth rate this week can mainly be attributed to downward revisions to estimates for companies in the Health Care (Abbott Laboratories) and Financials (AIG) sectors. On September 30, the estimated earnings growth rate for the index was 9.2%. Seven of the ten sectors have recorded an decline in earnings growth over this time frame, led by Materials, Information Technology, and Financials sectors.
In terms of preannouncements, 78 companies have issued negative EPS guidance for Q4 2012, while 28 companies has issued positive EPS guidance. Of the companies in the Information Technology sector that have provided EPS guidance for the quarter, an unusually high percentage (91%) have issued negative EPS guidance.
Despite the reductions in estimates, analysts are still calling for a return to earnings growth in Q4 (2.4%) after a decline in Q3 (-0.9%). Seven of the ten sectors are projected to report earnings growth for the quarter, led by the Financials sector (15.5%) sector. On the other hand, the Industrials (-4.6%), Information Technology (-2.8%), and Health Care (-2.6%) sectors are predicted to have the weakest earnings growth. In the Information Technology sector, Apple is predicted to report a year-over-year decline in EPS for the first time in over nine years. The current revenue growth rate for the index for Q4 is 2.1%, below an expectation of 2.7% growth at the start of the quarter. Slower economic growth in Europe and emerging markets countries (China) and less favorable foreign-exchange rates are expected to have a negative impact on both top-line and bottom-line growth for many multi-national companies in the index in the quarter. In addition, some companies have cited the damage caused by Hurricane Sandy and fiscal policy uncertainty as impediments to earnings and sales growth for the quarter as well.
The upcoming week marks the start of the fourth quarter earnings season, as Alcoa is schedule to announce earnings results on January 8. However, it will be a light week in terms of the overall number of companies reporting results, as just four other S&P 500 companies are expected to release earnings numbers during the week.