During the first two months of the second quarter, analysts decreased earnings estimates for companies in the S&P 500 for the quarter. The Q2 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q2 for all the companies in the index) decreased by 1.3% (to $55.36 from $56.06) during this period. How significant is a 1.3% decrease in the bottom-up EPS estimate during the first two months of a quarter? How does this decrease compare to recent quarters?
In a typical quarter, analysts usually reduce earnings estimates during the first two months of a quarter. 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 1.9%. During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.7%. During the past 15 years (60 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.4%.
Thus, the decline in the bottom-up EPS estimate recorded during the first two months of the second quarter was smaller than the five-year average, the 10-year average, and the 15-year average.
However, it should be noted that the second quarter also marked the largest decrease in the bottom-up EPS estimate during the first two months of a quarter since Q2 2020 (-35.9%), when there were widespread lockdowns in the U.S. due to COVID-19.
At the sector level, seven of the 11 sectors witnessed a decrease in their bottom-up EPS estimate for Q2 2022 from March 31 to May 31, led by the Consumer Discretionary (-15.8%) and Communication Services (-7.3%) sectors. On the other hand, four sectors recorded an increase in their bottom-up EPS estimate for Q2 2022 during this period, led by the Energy (+29.4%) and Materials (+8.7%) sectors.
While analysts were decreasing EPS estimates in aggregate for the second quarter, they were also increasing EPS estimates in aggregate for the next two quarters by small margins. The bottom-up EPS estimate for the third quarter increased by 0.4% (to $59.52 from $59.26) from March 31 to May 31, while the bottom-up EPS estimate for the fourth quarter increased by 0.2% (to $60.78 from $60.74) during this same period.
Given the slight increases in bottom-up EPS estimates for third and fourth quarters and the larger increase in the bottom-up EPS estimate for the first quarter (+4.5%) due to companies reporting positive earnings surprises, analysts also increased EPS estimates for all of 2022 during this period. The CY 2022 bottom-up EPS estimate increased by 0.7% (to $229.49 from $227.83) from March 31 to May 31.
At the sector level, five sectors witnessed a decrease in their bottom-up EPS estimate for CY 2022 from March 31 to May 31, led by the Consumer Discretionary (-10.8%) sector. On the other hand, five sectors witnessed an increase in their bottom-up EPS estimates for CY 2022 during this time, led by the Energy (+24.4%) and Materials (+9.3%) sectors. One sector (Utilities) recorded no change in its bottom-up EPS estimate for CY 2022 during this period.
In addition, analysts have increased earnings estimates for CY 2023, as the bottom-up EPS estimate for CY 2023 increased by 0.6% (to $251.53 from $250.03) from March 31 to May 31.
It is interesting to note that as the bottom-up EPS estimate for Q2 2022 decreased and the bottom-up EPS estimates for CY 2022 and CY 2023 increased during the first two months of the quarter, the value of the S&P 500 decreased during this same period. From March 31 through May 31, the value of the index decreased by 8.8% (to 4132.15 from 4530.41). With prices falling and earnings estimates rising, the forward 12-month P/E ratio for the S&P 500 declined to 17.4 from 19.4 during this period.
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