Cuts to S&P 500 EPS Estimates Below Long-Term Averages in Q3

During the third quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q3 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for all the companies in the index) has dropped by 3.0% (to $32.83 from $33.86) during this period. How significant is a 3.0% decline in the bottom up EPS estimate during a quarter? How does this decrease compare to recent quarters?

During the past year (four quarters), the average decline in the bottom-up EPS estimate during a quarter has been 2.8%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.2%. During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 6.0%. Thus, the decline in the bottom-up EPS estimate recorded during the third quarter was larger than the one-year average, but smaller than both the five- and 10-year averages.

Sector Level Breakdown of EPS Estimates

At the sector level, all 11 sectors recorded a decline in their bottom-up EPS estimate during the quarter. Five sectors recorded a decline in their bottom-up EPS estimate that was smaller than both the five- and 10-year averages for the sector, led by the Information Technology (-0.1%) sector. On the other hand, three sectors recorded a decline in their bottom-up EPS estimate that was larger than both the five- and 10-year averages for the sector, led by the Energy (-16.4%) sector. It interesting to note that most of the drop in the bottom-up EPS estimate for the Energy sector occurred during the month of June. This sector actually recorded a 3.1% increase in the bottom-up EPS estimate during the month of September.

As the bottom-up EPS estimate for the index declined the quarter, the value of the S&P 500 increased during this same period. From June 30 through September 28, the value of the index increased by 3.6% (to 2510.06 from 2423.41). Assuming the price of the index closes above 2423.41 today, this quarter will mark the 17th time in the past 20 quarters in which the bottom-up EPS estimate decreased during the quarter while the value of the index increased over this same period.