During the month of July, analysts increased earnings estimates for companies in the S&P 500 for the third quarter. The Q3 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q3 for all the companies in the index) increased by 1.1% (to $32.13 from $31.78) during this period. How significant is a 1.1% increase in the bottom-up EPS estimate during the first month of a quarter? How does this increase compare to recent quarters?
During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 2.8%. During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 2.3%. During the past 15 years (60 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 2.4%. Thus, while analysts typically lower EPS estimates during the first month of a quarter, they increased EPS estimates during the first month of Q3 2020.
In fact, this marked the first increase in the bottom-up EPS estimate over the first month of a quarter since Q1 2008 (+4.9%). Prior to Q1 2018, the last time the bottom-up EPS estimate increased over the first month of a quarter was Q2 2011 (+2.1%).
However, it should be noted that analysts made substantial cuts to EPS estimates for Q3 during the second quarter (March 31 to June 30). During this period, the Q3 bottom-up EPS estimate declined by 23.6% (to 31.78 from $41.60)
At the sector level, six sectors recorded an increase in their bottom-up EPS estimate for Q3 during the first month of the quarter, led by the Energy (to -$0.34 from -$0.86), Consumer Discretionary (to $5.75 from $5.41), and Financials (to $6.61 from $6.29) sectors. Five sectors recorded a decline in their bottom-up estimate for Q3 during the first month of the quarter, led by the Industrials (to $3.62 from $3.98) sector.
As the bottom-up EPS estimate for the index increased during the first month of the quarter, the value of the S&P 500 also increased during this same period. From June 30 through July 30, the value of the index increased by 4.7% (to 3246.22 from 3100.29). Assuming the value of the index does not fall below 3100.29 today, the third quarter will mark just the second time in the past 20 quarters in which both the bottom-up EPS estimate for the index and the value of the index increased during the first month of the quarter.