During the month of July, analysts lowered 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 all the companies in the index) dropped by 1.6% (to $42.21 from $42.90) during this period. How significant is a 1.6% decline in the bottom-up EPS estimate during the first month of a quarter? How does this decrease 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 1.7%. 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 1.2%. 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 1.8%. Thus, the decline in the bottom-up EPS estimate recorded during the first month of the third quarter was smaller than the five-year average, larger than the 10-year average, and smaller than the 15-year average.
At the sector level, eight sectors recorded a decline in their bottom-up EPS estimate during the first month of the quarter, led by the Materials (-8.4%) and Energy (-7.4%) sectors. On the other hand, three sectors recorded an increase in their bottom-up EPS estimate during the first month of the quarter, led by the Information Technology (+1.6%) sector. Overall, seven sectors recorded a larger decrease in their bottom-up EPS estimate relative to their five-year average, eight sectors recorded a larger decrease in their bottom-up EPS estimate relative to their 10-year average, and seven sectors recorded a larger decrease in their bottom-up EPS estimate relative to their 15-year average.
As the bottom-up EPS estimate for the index declined during the first month of the quarter, the value of the S&P 500 increased during this same period. From June 30 through July 31, the value of the index increased by 1.3% (to 2980.38 from 2941.76). The third quarter marked the fifteenth time in the past 20 quarters in which the bottom-up EPS estimate decreased during the first month of the quarter while the value of the index increased over this same period.