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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 EPS estimates for all the companies in the index) has increased by 5.4% (to $36.24 from $34.37) during this period. How significant is a 5.4% increase in the bottom-up EPS estimate during a quarter? How does this increase compare to recent quarters?

Comparing EPS Estimates to Recent Quarters

On average, the 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 3.9% during a quarter. During the past 10 years (40 quarters), the bottom-up EPS estimate has recorded an average decline of 5.5% during a quarter. During the past 15 years (60 quarters), the bottom-up EPS estimate has recorded an average decline of 4.1% during a quarter.

SP500_ChangeInQuarterlyBottomUpEPS

In fact, the first quarter of 2018 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 for the largest increase in the bottom-up EPS estimate was 4.8%, which occurred in Q2 2004.

At the sector level, 10 of the 11 sectors recorded an increase in their bottom-up EPS estimates during the quarter, led by the Energy (+14.6%), Telecom Services (+14.1%), and Financials (+11.3%) 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) has increased by 7.1% (to $157.77 from $147.24) since December 31, 2017.

This increase marked the largest increase in the annual 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.

ChangeInSP500AnnualEPS_FirstThreeMonthsOfYear

 

Sector-Level Breakdown

At the sector level, 10 of the 11 sectors have recorded an increase in their bottom-up EPS estimates for 2018 during this window, led by the Energy sector (+18.0%), Telecom Services (+15.3%), Industrials (+10.2%), and Financials (+9.9%) sectors.

What has driven the increase in the bottom-up EPS estimate for Q1 2018 and CY 2018 over the past three months? 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 have likely 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.

SP 500 Change in Q1 18 EPS vs Change in Price

As the bottom-up EPS estimate for the first quarter rose, the value of the S&P 500 decreased during this same period. From December 31, 2017 through March 28, the value of the index decreased by 2.6% (to 2605.00 from 2673.61). Assuming the closing price of the index today is below 2673.61, the first quarter will mark the first time since Q2 2010 in which the bottom-up EPS estimate for the quarter increased, while the value of the index decreased during the quarter.

It is important to note that most of the upward revisions to EPS estimates for Q1 2018 and CY 2018 occurred in January. The bottom-up EPS estimates have actually decreased slightly during the month of March. During the month of January, the bottom-up EPS estimate for Q1 2018 rose by 4.9%, while the bottom-up EPS estimate for CY 2018 rose by 5.4%. During the month of February, the bottom-up EPS estimate for Q1 2018 increased by 0.8%, while the bottom-up EPS estimate for CY 2018 increased by 1.8%. During the month of March, the bottom-up EPS estimate for Q1 2018 has decreased by 0.3%, while the bottom-up EPS estimate for CY 2018 has decreased by 0.2%.

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Senior Earnings Analyst
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.

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