Since the start of the first quarter, the value of the S&P 500 has fallen by 7.8% (to 2978.76 from 3230.78). Much of this decrease has been attributed to fear and uncertainty about the impact of the coronavirus on the global economy. Given these concerns, analysts also have lowered earnings estimates during the first two months of the quarter for companies in the S&P 500. The Q1 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for all the companies in the index) has dropped by 3.3% (to $39.33 from $40.68) during this period. How significant is a 3.3% decline in the bottom-up EPS estimate during the first two months 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 two months of a quarter has been 2.6%. 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 2.3%. 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 3.3%. Thus, the decline in the bottom-up EPS estimate recorded during the first two months of the first quarter was larger than the five-year average and the 10-year average, but equal to the 15-year average.
It is important to note that while this 3.3% decline is above the five-year average and the 10-year average, it is not an unusually high number. It is smaller than the decline recorded in the previous quarter (-4.2%) over the same time frame. It does not rank as one of the 10 largest declines in the bottom-up EPS estimate (over the first two months of the quarter) in the past 10 years. It is also much smaller than the declines of -23.6% and -27.8% recorded during the first two months of Q4 2008 and Q1 2009.
Given these numbers, have analysts been slow to react to the impact of the coronavirus and reduce EPS estimates even more for Q1?
Analysts may be waiting for more guidance from companies before revising estimates even lower for Q1. As of today, 68 S&P 500 companies have issued EPS guidance below the expectations of analysts (e.g. issued negative EPS guidance) for the first quarter. This number is below the five-year average of 75. However, early in the quarter, a number of S&P 500 companies stated they were unable to quantify an impact from the coronavirus or did not include the impact from the coronavirus in their guidance. Thus, there may be an increase in the number of companies issuing negative guidance later in the first quarter as these companies gain clarity on the impact of the coronavirus on their businesses. This potential increase would also likely lead to more downward revisions to EPS estimates. Please refer to my article published on February 14, 2020, for more details.
On the other hand, is it possible analysts are not as pessimistic as the market (at this point in time) on the impact of the coronavirus on S&P 500 earnings for Q1?
The estimate revisions to date for companies in the Information Technology sector may support this view. First, the Information Technology sector has the highest revenue exposure to China of all 11 sectors at 13.4%. Second, 23 companies in the Information Technology sector have issued negative EPS guidance for Q1, which is above the five-year average of 20 for this sector. However, despite high exposure to China and more negative guidance than average, analysts have actually increased their earnings estimates (in aggregate) for this sector since the start of the quarter. The bottom-up EPS estimate for the Information Technology sector for Q1 has risen by 1.6% (to $16.56 from $16.30) since December 31. As a result, the estimated earnings growth rate for the Information Technology sector (based on mean EPS estimates) for Q1 has increased to 6.1% today compared to 4.2% on December 31. Companies that have been significant contributors to the increase in expected earnings for this sector include Intel ($1.31 mean EPS today vs. $1.03 mean EPS on December 31) and Microsoft ($1.32 mean EPS today vs. $1.24 mean EPS on December 31). The revenue exposure of Intel to China is 27%, while the revenue exposure of Microsoft to China is 11%.
Either way, the market will definitely keep a close eye on both guidance from S&P 500 companies and EPS estimate revisions by analysts for S&P 500 companies over the next several weeks.