During the first two months of the third quarter, analysts increased earnings estimates for companies in the S&P 500 for the 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 2.6% (to $32.62 from $31.78) during this period. How significant is a 2.6% increase in the bottom-up EPS estimate during the first two months 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 two months of a quarter has been 4.1%. During the past ten years (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.4%. During the past fifteen years (60 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.9%. Thus, while analysts typically lower EPS estimates during the first two months of a quarter, they increased EPS estimates during the first two months of Q3 2020.
In fact, this marked the first increase in the bottom-up EPS estimate over the first two months of a quarter since Q2 2018 (+0.2%) and Q1 2018 (+5.7%). Prior to Q1 2018, the last time the bottom-up EPS estimate increased over the first two months of a quarter was Q2 2011 (+1.5%). 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 two months of the quarter, led by the Energy (to -$0.31 from -$0.86), Consumer Discretionary (to $6.60 from $5.41), and Financials (to $6.78 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 $3.69 from $3.98) sector.
As the bottom-up EPS estimate for the index increased during the first two months of the quarter, the value of the S&P 500 also increased during this same period. From June 30 through August 31, the value of the index increased by 12.9% (to 3500.31 from 3100.29). The third quarter marked just the third 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 two months of the quarter.