Large Upside Earnings Surprises vs. Lowered Estimates for the S&P 500

The earnings surprise percentage (which reflects the aggregate amount by which companies are reporting actual earnings above estimated earnings) for Q1 stands at 6.4%, which is well above the five-year average (5.4%). In fact, if 6.5% is the final surprise percentage for the quarter, it will mark the highest surprise percentage for a quarter since Q1 2011 (7.0%).

However, are companies reporting large upside earnings surprises for Q1 in part because analysts lowered estimates by larger than average margins during the first quarter?

The answer is yes. During the first quarter (from December 31 to March 31), analysts lowered earnings estimates for S&P 500 companies in aggregate by 8.2% for the first quarter. This 8.2% decline was the largest decrease in the estimated earnings for a quarter since Q1 2009. As a result of these large cuts to earnings estimates, the estimated earnings growth rate for the first quarter dropped by 9.0 percentage points (to -4.7% from 4.3%) during the quarter. This was the largest percentage point decline in the earnings growth rate for a quarter for the index since Q1 2009.

At the sector level, the Energy sector has reported the highest earnings surprise percentage to date of all ten sectors at 28.7%. During the first quarter, analysts lowered earnings estimates for companies in the Energy sector in aggregate by 50.3% for the first quarter. This was the largest decline in expected earnings for the Energy sector for a quarter since FactSet began tracking the data in 2002. As a result of these large cuts to estimates, the estimated earnings decline for the Energy sector increased by 34.7 percentage points (to -64.5% from -29.7%) over this period. This was the largest negative percentage point change in terms of earnings growth of all 10 sectors. In fact, the Energy sector accounted for almost half of the decrease in the expected earnings growth rate for the entire S&P 500 during Q1.