During the fourth quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the EPS estimates for all the companies in the index) dropped by 2.2% (to $30.86 from $31.55) during this period. How significant is a 2.2% 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 4.7%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.3%. During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 5.6%. Thus, the decline in the bottom-up EPS estimate recorded during the fourth quarter was smaller than the one-year, five-year, and 10-year averages.
One of the sectors contributing to the below average decline in the bottom-up EPS estimate for the S&P 500 over the past two months is the Information Technology sector. This sector recorded an increase in the bottom-up EPS estimate of 1.3% (to $13.32 from $13.15) during the quarter. This 1.3% increase was well above the average decline of 3.6% over the past year and the average decline of 3.8% over the past five years in the bottom-up EPS estimate for this sector during a quarter. The Information Technology sector is one of just two sectors in which more companies have issued positive EPS guidance (17) than negative EPS guidance (15) for Q4 2016 (see the full report for more details).
As the bottom-up EPS estimate declined during the quarter, the value of the S&P 500 increased during this same time frame. From September 30 through December 31, the value of the index increased by 3.3% (to 2238.83 from 2168.27). The fourth quarter marked the sixteenth 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 time frame.
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.