Record-High Increase in S&P 500 EPS Estimates for Q2

During the second quarter, analysts increased earnings estimates for companies in the S&P 500 for the quarter. The Q2 bottom-up EPS estimate (which is an aggregation of the median Q2 EPS estimates for all the companies in the index) increased by 7.3% (to $45.03 from $41.97) during this period. How significant is a 7.3% increase in the bottom-up EPS estimate during a quarter? How does this increase compare to recent quarters?

Tracking Movements in the Bottom-Up EPS Estimate During a Quarter

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 3.4% during a quarter. During the past 10 years (40 quarters), the bottom-up EPS estimate has recorded an average decline of 4.0% during a quarter. During the past 15 years (60 quarters), the bottom-up EPS estimate has recorded an average decline of 5.0% during a quarter.

In fact, the second 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 6.5%, which occurred in the previous quarter (Q1 2021).

As the bottom-up EPS estimate for the second quarter rose during the quarter, the value of the S&P 500 also rose during this same period. From March 31 through June 30, the value of the index increased by 8.2% (to 4297.50 from 3972.89). The second quarter marked just the fifth time since 2010 (but also the fourth consecutive quarter) in which both the bottom-up EPS estimate and the value of the index increased during the quarter.

At the sector level, nine of the 11 sectors recorded an increase in their bottom-up EPS estimates during the quarter, led by the Energy (+36.6%), Materials (+16.8%), Financials (+9.3%), Information Technology (+9.0%), and Communication Services (+8.9%) sectors. On the other hand, the Utilities (-2.1%) and Consumer Staples (-0.1%) sectors were the only two sectors that recorded a decrease in their bottom-up EPS estimates for Q2 during this time.

Analysts have not only increased EPS estimates for the second 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 8.6% (to $191.31 from $176.13) during the second quarter (from March 31 to June 30). This increase marked the largest increase in the annual bottom-up EPS estimate for the index during the calendar second quarter since FactSet began tracking the annual bottom-up EPS estimate in 1996. The previous record was 4.2%, which occurred in the second quarter of 2004. At the sector level, all 11 sectors recorded an increase in their annual bottom-up EPS estimate from March 31 to June 30, led by the Energy (+32.2%), Materials (+19.2%), and Financials (+16.2%) sectors.

What Factors Are Driving the Upward Revisions to EPS Estimates?

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 Q2 2021 and CY 2021 declined by 19.3% (to $38.87 from $48.14) and 16.9% (to $163.43 from $196.78), 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 second quarter of 2021, which marked the fourth 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, expectations for overall economic growth have been rising as well. According to FactSet Economic Estimates, the estimated real GDP growth rates for the U.S. for the second quarter and for the full year are higher today compared to the start of the quarter. For the second quarter, the estimated real (Y/Y) GDP growth rate is 13.1% today, compared to an estimate of 11.7% on March 31. For CY 2021, the estimated real (Y/Y) GDP growth rate is 6.5% today, compared to an estimate of 5.8% on March 31.

Third, higher commodity prices are driving some of the upward revisions to EPS estimates. For example, the price of oil increased by 24% (to $73.47 from $59.16) during the second quarter, while the value of S&P GSCI Industrial Metals index increased by 10% (to 460.27 from 418.10) over this same period. The Energy and Materials sectors have seen the highest percentage increases in their bottom-up EPS estimates for the second quarter and for the full year over the past three months. Earnings for both of these sectors are likely benefitting from higher commodity prices.

Finally, companies in the S&P 500 have been much more optimistic in their EPS guidance than normal. As of today, 66 S&P 500 companies have issued positive EPS guidance (defined as above the mean EPS estimate of analysts) for the second quarter, which is well above the five-year average of 37. If 66 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 66 companies, 28 are in the Information Technology sector. As previously noted, this sector witnessed the fourth largest increase in its bottom-up EPS estimate of all 11 sectors during the quarter. For more details on EPS guidance, read this recent article.

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