Record-High Increase in S&P 500 EPS Estimates for Q1 2018 and 2018 to Date

During the first two months of 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 EPS estimates for all the companies in the index) rose by 5.7% (to $36.32 from $34.37) during this period. How significant is a 5.7% increase in the bottom-up EPS estimate during the first two months of a quarter? How does this decrease compare to recent quarters?
On average, the bottom-up EPS estimate usually decreases during the first two months of a quarter. During the past year (four quarters), the bottom-up EPS estimate has recorded an average decline of 1.8% during the first two months of a quarter. During the past five years (20 quarters), the bottom-up EPS estimate has recorded an average decline of 3.1% during the first two months of a quarter. During the past 10 years (40 quarters), the bottom-up EPS estimate has recorded an average decline of 4.0% during the first two months of a quarter.

In fact, the first quarter of 2018 marked the largest increase in the bottom-up EPS estimate over the first two months of a quarter since FactSet began tracking the quarterly bottom-up EPS estimate in Q2 2002. The previous record for the largest increase in the bottom-up EPS estimate was 4.4%, which occurred during the first two months (October through November) of Q4 2009.

At the sector level, nine of the eleven sectors recorded an increase in their bottom-up EPS estimates during the first two months of the quarter, led by the Energy (+18.9%), Telecom Services (+14.8%), and Financials (+11.5%) sectors.

Analysts have not only increased EPS estimates for the first quarter, but also for the full year. The CY 2018 bottom-up EPS estimate (which is an aggregation of the median 2018 EPS estimates for all of the companies in the index and can be used as a proxy for earnings) increased by 7.3% (to $157.97 from $147.24) from December 31 through February 28.

This is the largest increase in the annual EPS estimate for the index over the first two months of the year since FactSet began tracking the annual bottom-up EPS estimate in 1996.

At the sector level, ten of the eleven sectors have recorded an increase in their bottom-up EPS estimates for 2018 during this window, led by the Energy sector (+19.6%), Telecom Services (+15.7%), and Financials (+10.2%) sectors.

What is driving the increase in the bottom-up EPS estimate for Q1 2018 and CY 2018? The decrease in the corporate tax rate for 2018 due to the new tax law is clearly a significant factor in the upward revisions to EPS estimates. The rapid increase in earnings expectations for Q1 2018 and CY 2018 occurred just after the tax bill was signed into law. However, it is difficult to quantify the exact impact of the changes in the tax rate on the upward revisions. Other factors also have fueled the increase in earnings estimates as well. For example, rising oil prices through the month of January contributed to the large increase in earnings estimates for companies in the Energy sector. Expectations for higher interest rates in 2018 have also likely contributed to the significant increase in earnings estimates for companies in the Financials sector.

As the bottom-up EPS estimate for the first quarter rose during the first two months of the quarter, the value of the S&P 500 also increased during this same period. From December 31 through February 28, the value of the index increased by 1.5% (to 2713.83 from 2673.61). The first quarter marked the first time since Q2 2011 in which both the bottom-up EPS estimate for the quarter and the value of the index increased during the first two months of the quarter.