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.
John’s weekly research report, Earnings Insight provides analysis and commentary on trends in corporate earnings data for the S&P 500, including revisions to estimates, year-over-year growth, performance relative to expectations, and valuations. He is a widely used source for the media and has appeared on CNBC, Fox Business News, and the Business News Network. In addition, he has been cited by numerous print and online publications such as The Wall Street Journal, Financial Times, The New York Times, MarketWatch, and Yahoo! Finance.