Given the decline in GDP for a second straight quarter, have analysts lowered EPS estimates more than normal for S&P 500 companies for the third quarter?
The answer is yes. During the month of July, analysts lowered EPS estimates for the third quarter by a larger margin than average. The Q3 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q3 for all the companies in the index) decreased by 2.5% (to $57.98 from $59.44) from June 30 to July 28.
In a typical quarter, analysts usually reduce earnings estimates during the first month of a quarter. 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 1.3%. 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 1.8%. 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 2.1%. During the past 20 years (80 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.7%.
Thus, the decline in the bottom-up EPS estimate recorded during the first month of the third quarter was larger than the five-year average, 10-year average, 15-year average, and 20-year average. The third quarter also marked the largest decrease in the bottom-up EPS estimate during the first month of a quarter since Q2 2020 (-29.0%).
At the sector level, nine of the 11 sectors witnessed a decrease in their bottom-up EPS estimate for Q3 2022 from June 30 to July 28, led by the Communication Services (-9.6%) and Materials (-5.1%) sectors. On the other hand, two sectors recorded an increase in their bottom-up EPS estimate for Q3 2022 during this period, led by the Energy (+7.7%) sector.
While analysts were decreasing EPS estimates in aggregate for the third quarter, they were also decreasing EPS estimates in aggregate for the fourth quarter. The bottom-up EPS estimate for the fourth quarter declined by 2.4% (to $59.26 from $60.73) from June 30 to July 28.
Given the decreases in the bottom-up EPS estimates for third quarter and fourth quarter, which were partially offset by the increase in the bottom-up EPS estimate for Q2 2022 (due to upward revisions to EPS estimates and positive EPS surprises) analysts also decreased EPS estimates for all of 2022 during this period. The CY 2022 bottom-up EPS estimate declined by 0.8% (to $227.77 from $229.63) from June 30 to July 28.
At the sector level, nine sectors witnessed a decrease in their bottom-up EPS estimate for CY 2022 from June 30 to July 28, led by the Communication Services (-5.5%) and Materials (-2.6%) sectors. On the other hand, two sectors witnessed an increase in their bottom-up EPS estimate for CY 2022 during this time, led by the Energy (+8.1%) sector.
In addition, analysts lowered earnings estimates for CY 2023 during this time, as the bottom-up EPS estimate for CY 2023 decreased by 2.0% (to $245.61 from $250.59) from June 30 to July 28.
It is interesting to note that the forward 12-month P/E ratio for the S&P 500 has increased to 17.1 from 15.8 since June 30, as the price of the index increased while EPS estimates for CY 2022 and CY 2023 declined during this time.
The market will certainly be watching EPS estimate revisions over the next few weeks to see if analysts continue to lower EPS estimates for CY 2022 and CY 2023.
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