Have Analysts Lowered EPS Estimates More Than Average for S&P 500 Companies for Q4?

Given continuing concerns in the market about a possible recession, did analysts lower EPS estimates more than normal for S&P 500 companies for the fourth quarter?

The answer is yes. During the fourth quarter, analysts lowered EPS estimates for the quarter by a larger margin than average. The Q4 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q4 for all the companies in the index) decreased by 6.5% (to $54.01 from $57.78) from September 30 to December 31.

In a typical quarter, analysts usually reduce earnings estimates during the quarter. Here is the average decline in the bottom-up EPS estimate during a quarter during the past:

• Five years (20 quarters): 2.5%

• Ten years, (40 quarters): 3.3%

• Fifteen years, (60 quarters): 4.8%

• Twenty years (80 quarters): 3.8%

Thus, the decline in the bottom-up EPS estimate recorded during the fourth quarter was larger than the 5-, 10-, 15- and 20-year averages. The fourth quarter also marked the second-largest decrease in the bottom-up EPS estimate during a quarter since Q2 2020 (-37.0%), trailing only the previous quarter (-6.8%).

At the sector level, nine of the 11 sectors witnessed a decrease in their bottom-up EPS estimate for Q4 2022 from September 30 to December 31, led by the Materials (-18.8%), Consumer Discretionary (-13.5%), and Communication Services (-11.8%) sectors. On the other hand, two sectors witnessed an increase in their bottom-up EPS estimates for Q4 2022 during this time: Energy (+2.0%) and Utilities (+2.0%).

While analysts were decreasing EPS estimates in aggregate for the fourth quarter, they were also decreasing EPS estimates in aggregate for CY 2023. The bottom-up EPS estimate for CY 2023 declined by 4.4% (to $230.51 from $241.20) from September 30 to December 31.  

During the fourth quarter, analysts usually reduce earnings estimates for the next fiscal year. Here is the average decline in the bottom-up EPS estimate for the next year during the fourth quarter during the past:

• Five years (20 quarters): 0.2%

• Ten years, (40 quarters): 1.3%

• Fifteen years: 2.7%

• Twenty years (80 quarters): 2.2%

Thus, the decline in the CY 2023 bottom-up EPS estimate recorded during the fourth quarter was larger than the 5-, 10-, 15-, and 20-year averages for the fourth quarter. It also marked the largest decline in the bottom-up EPS estimate for the next year during a fourth quarter since Q4 2014, when the bottom-up EPS estimate for CY 2015 decreased by 4.6%.

At the sector level, nine sectors witnessed a decrease in their bottom-up EPS estimates for CY 2023 from September 30 to December 31, led by the Communication Services (-10.0%), Consumer Discretionary (-8.8%), and Materials (-7.7%) sectors. On the other hand, two sectors witnessed an increase in their bottom-up EPS estimates for CY 2023 during this time: Utilities (+1.0%) and Energy (+0.9%).

It is interesting to note that the forward 12-month P/E ratio for the S&P 500 has increased to 16.5 from 15.2 since September 30, as the price of the index has increased while EPS estimates for CY 2023 have decreased during this time.

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