Record-High Increase in S&P 500 EPS Estimates for Q1

During the first quarter, analysts increased earnings estimates for companies in the S&P 500 for the quarter. The Q1 bottom-up EPS estimate (which is an aggregation of the median Q1 EPS estimates for all the companies in the index) increased by 6.0% (to $39.86 from $37.61) during this period. How significant is a 6.0% increase in the bottom-up EPS estimate during a quarter? How does this increase compare to recent quarters?

On average, the quarterly bottom-up EPS estimate usually decreases during a quarter. During the past five years (20 quarters), the bottom-up EPS estimate has recorded an average decline of 4.2% during a quarter. During the past 10 years (40 quarters), the bottom-up EPS estimate has also recorded an average decline of 4.2% during a quarter. During the past 15 years (60 quarters), the bottom-up EPS estimate has recorded an average decline of 5.1% during a quarter.

In fact, the first quarter of 2021 marked the largest increase in the bottom-up EPS estimate during a quarter since FactSet began tracking the quarterly bottom-up EPS estimate in Q2 2002. The previous record was 5.4%, which occurred in Q1 2018 after tax reform was passed.

As the bottom-up EPS estimate for the first quarter rose during the quarter, the value of the S&P 500 also rose during this same period. From December 31 through March 31, the value of the index increased by 5.8% (to 3972.89 from 3756.07). The first quarter marked only the fourth time since 2010 but also the third consecutive quarter in which both the bottom-up EPS estimate and the value of the index increased during the quarter.

Sector Analysis

At the sector level, seven of the 11 sectors recorded an increase in their bottom-up EPS estimates during the quarter. Six of these seven sectors recorded an increase that was above their five-year average, their 10-year average, and their 15-year average. Two of these six sectors (Energy and Information Technology) recorded the largest increase in their bottom-up EPS estimate since FactSet began tracking this metric in 2002.

The Energy sector recorded the largest increase in its bottom-up EPS estimate of all 11 sectors during the quarter at 123.4% (to $2.55 from $1.14). This rise also marked the largest quarterly increase in the bottom-up EPS estimate for this sector since FactSet began tracking this metric in 2002. The previous record was 46.8%, which occurred in Q1 2003. In addition, the Energy sector witnessed the largest price increase of all 11 sectors during the quarter at 29.3% (to 369.89 from 286.14).

The Financials sector recorded the second-largest increase in its bottom-up EPS estimate of all 11 sectors during the quarter at 13.1% (to $9.41 from $8.32). This rise also marked the second-largest quarterly increase in the bottom-up EPS estimate for this sector since FactSet began tracking this metric in 2002. In addition, the Financials sector witnessed the second-largest price increase of all 11 sectors during the quarter at 15.4% (to 565.72 from 490.43).

The Materials sector recorded the third-largest increase in its bottom-up EPS estimate of all 11 sectors during the quarter at 12.8% (to $5.63 from $4.99). This rise also marked the third-largest quarterly increase in the bottom-up EPS estimate for this sector since FactSet began tracking this metric in 2002. In addition, the Materials sector witnessed the fourth-largest price increase of all 11 sectors during the quarter at 8.6% (to 494.71 from 455.71).

The Information Technology sector recorded the fourth-largest increase in its bottom-up EPS estimate of all 11 sectors during the quarter at 9.0% (to $20.15 from $18.48). This rise also marked the largest quarterly increase in the bottom-up EPS estimate for this sector since FactSet began tracking this metric in 2002. The previous record was 8.8%, which occurred in Q2 2010. Despite the unusually large increase in earnings, the Information Technology witnessed the second-smallest price increase of all 11 sectors during the quarter at 1.7% (to 2331.06 from 2291.28).

CY 2021 Estimates

Analysts have not only increased EPS estimates for the first quarter, but also for the full year. The CY 2021 bottom-up EPS estimate (which is an aggregation of the median 2021 EPS estimates for all of the companies in the index) increased by 5.0% (to $175.75 from $167.37) during the first quarter.

On average, the annual bottom-up EPS estimate usually decreases during the first three months of the year. During the past five years, the annual bottom-up EPS estimate has recorded an average decline of 2.5% during the first three months of the year. During the past 10 years, the annual bottom-up EPS estimate has recorded an average decline of 2.0% during the first three months of the year. During the past 15 years, the annual bottom-up EPS estimate has recorded an average decline of 3.3% during the first three months of the year. During the past 20 years, the annual bottom-up EPS estimate has recorded an average decline of 3.0% during the first three months of the year.

In fact, this increase marked the second-largest increase in the annual bottom-up EPS estimate for the index over the first three months of the year since FactSet began tracking the annual bottom-up EPS estimate in 1996. The current record is 7.1%, which occurred in the first three months of 2018 after tax reform passed.

At the sector level, eight of the 11 sectors recorded an increase in their bottom-up EPS estimates for 2021 during this first three months of the year, led by the Energy (+69.5%), Materials (+13.2%), Financials (+11.2%), and Information Technology (+5.7%) sectors. These are the same four sectors that witnessed the largest increases in their quarterly bottom-up EPS estimates during the first three months of the year.

What Factors Are Driving the Upward Revisions to EPS Estimates for the First Quarter and the Full Year?

First, it appears analysts may have been too aggressive in their downward revisions to EPS estimates during the first half of 2020 at the height of the COVID-19 lockdowns. From December 31 (2019) through June 30 (2020), the bottom-up EPS estimates for Q1 2021 and CY 2021 declined by 16.5% (to $37.40 from $44.78) and 16.9% (to $163.48 from $196.81), respectively. Starting in Q3 2020, analysts reversed course and started raising EPS estimates for the third quarter and for future quarters. This trend continued through the first quarter of 2021, which marked the third consecutive quarter in which the bottom-up EPS estimate increased during the quarter. However, prior to Q3 2020, the (quarterly) bottom-up EPS estimate had only increased in two other quarters (Q1 2018 and Q2 2018) in the past 10 years.

Second, it appears expectations for overall economic growth have been rising as well. According to FactSet Economic Estimates, the estimated GDP growth rate for the U.S. for the first quarter and the full year are higher today compared to the start of the quarter. For the first quarter, the estimated GDP growth rate is 4.8% today, compared to an estimate of 2.7% on December 31. For CY 2021, the estimated GDP growth rate is 5.7% today, compared to an estimate of 4.0% on December 31.

Third, rising commodity prices and interest rates appear to be driving some of the upward revisions to EPS estimates. The prices of many commodities are higher now relative to the start of the year. For example, the price of oil increased by 22% (to $59.16 from $48.52) during the first quarter, while the value of S&P GSCI Industrial Metals index increased by 9% (to 418.10 from 381.92) over this same period. In addition, the yield on the 10-year Treasury note increased to 1.74% from 0.92% during the quarter. The Energy, Materials, and Financials sectors have seen the highest percentage increases in their bottom-up EPS estimates for the first quarter and for the full year over the past three months. Earnings for all three of these sectors are likely benefitting from either higher commodity prices (Energy and Materials) or higher interest rates (Financials).

Finally, companies in the S&P 500 have been much more optimistic in their EPS guidance than normal. As of today, 61 S&P 500 companies have issued positive EPS guidance (defined as above the mean EPS estimate of analysts) for the first quarter, which is well above the five-year average of 35. If 61 is the final number for the quarter, it will mark the highest number of S&P 500 companies issuing positive EPS guidance for a quarter since FactSet began tracking this metric in 2006. Of these 61 companies, 29 are in the Information Technology sector. As previously noted, this sector witnessed the fourth largest increase in its bottom-up EPS estimate for Q1 2021 (+9.0%) and for CY 2021 (+5.7%) during the first three months of the year. For more details on EPS guidance, please see this recent article.

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