Given the decline in U.S. GDP in the first quarter and the second quarter, are analysts lowering EPS estimates more than normal for S&P 500 companies for the third quarter?
The answer is yes. During the months of July and August, analysts lowered EPS estimates for the third quarter by a larger margin than average. The Q3 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q3 for all the companies in the index) decreased by 5.4% (to $56.21 from $59.44) from June 30 to August 31.
In a typical quarter, analysts usually reduce earnings estimates during the first two months of a quarter. 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 1.9%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.7%. During the past fifteen years, (60 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.5%. During the past 20 years (80 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.9%.
Thus, the decline in the bottom-up EPS estimate recorded during the first two months of the third quarter was larger than the 5-year average, the 10-year average, the 15-year average, and the 20-year average. The third quarter also marked the largest decrease in the bottom-up EPS estimate during the first two months of a quarter since Q2 2020 (-35.9%).
At the sector level, nine of the eleven sectors witnessed a decrease in their bottom-up EPS estimate for Q3 2022 from June 30 to August 31, led by the Communication Services (-12.8%) and Information Technology (-9.1%) sectors. On the other hand, two sectors recorded an increase in their bottom-up EPS estimate for Q3 2022 during this period, led by the Energy (+9.6%) sector.
While analysts were decreasing EPS estimates in aggregate for the third quarter, they were also decreasing EPS estimates in aggregate for the fourth quarter. The bottom-up EPS estimate for the fourth quarter declined by 3.5% (to $58.60 from $60.73) from June 30 to August 31.
Given the decrease in the bottom-up EPS estimates for the third quarter and the fourth quarter, which was partially offset by the increase in the bottom-up EPS estimate for the second quarter (due to upward revisions to EPS estimates and positive EPS surprises) analysts also decreased EPS estimates for all of 2022 during this period. The CY 2022 bottom-up EPS estimate declined by 1.5% (to $226.15 from $229.60) from June 30 to August 31.
At the sector level, nine sectors witnessed a decrease in their bottom-up EPS estimate for CY 2022 from June 30 to August 31, led by the Communication Services (-8.3%) and Consumer Discretionary (-6.9%) sectors. On the other hand, two sectors witnessed an increase in their bottom-up EPS estimate for CY 2022 during this time, led by the Energy (+12.3%) sector.
In addition, analysts lowered earnings estimates for CY 2023 during this time, as the bottom-up EPS estimate for CY 2023 decreased by 2.8% (to $243.68 from $250.61) from June 30 to August 31.
It is interesting to note that the forward 12-month P/E ratio for the S&P 500 has increased to 16.7 from 15.8 since June 30, as the price of the index has increased by 4.8% while EPS estimates for CY 2022 and CY 2023 have decreased during this time.
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