Analysts Increased EPS Estimates for S&P 500 Companies for 2nd Straight Quarter in Q4

During the fourth quarter, analysts increased earnings estimates for companies in the S&P 500 for the quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q4 for all the companies in the index) increased by 2.3% (to $36.93 from $36.10) during the quarter. How significant is a 2.3% increase in the bottom-up EPS estimate during a quarter? How does this increase compare to recent quarters?

In a typical quarter, analysts usually reduce earnings estimates during the quarter. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.5%. During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.2%. During the past 15 years (60 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 5.2%.

Thus, while analysts usually lower EPS estimates during a quarter, they increased EPS estimates during Q4 2020. In fact, the fourth quarter marked the second straight quarter and just the fourth quarter since Q4 2010 in which the bottom-up EPS estimate increased during the quarter.

However, it should be noted that analysts made substantial cuts to EPS estimates for Q4 during the second and third quarters (March 31 to September 30). During this period, the Q4 bottom-up EPS estimate declined by 17.4% (to $36.10 from $43.73).

At the sector level, six sectors recorded an increase in their bottom-up EPS estimate during Q4, led by the Financials (to $8.08 from $6.82), Materials (to $4.48 from $4.14), and Communication Services (to $2.20 from $2.06) sectors. Five sectors recorded a decline in their bottom-up estimate during Q4, led by the Energy (to $0.17 from $0.60) sector.

As the bottom-up EPS estimate for the index increased during the quarter, the value of the S&P 500 also increased during this same period. From September 30 through December 31, the value of the index increased by 11.7% (to 3756.07 from 3363.00). The fourth quarter marked just the third time in the past 20 quarters (five years) in which both the bottom-up EPS estimate for the index and the value of the index increased during the quarter.

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