Smallest Cuts to EPS Estimates since 2010 for S&P 500 Companies

During the fourth quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for all the companies in the index) dropped by 0.3% (to $34.90 from $35.00) during this period. How significant is a 0.3% decline in the bottom-up EPS estimate during a quarter? How does this decrease compare to recent quarters?

During the past year (four quarters), the average decline in the bottom-up EPS estimate during a quarter has been 3.1%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.2%. During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 6.0%. Thus, the decline in the bottom-up EPS estimate recorded during the fourth quarter was smaller than the one-year, five-year, and 10-year averages.

In fact, the fourth quarter of 2017 marked the smallest decline in the bottom-up EPS estimate during a quarter since Q4 2010 (+0.6%).

Sector Level Observations

Why has the index recorded such a small decline in the bottom-up EPS estimate during the fourth quarter? At the sector level, seven of 10 sectors recorded a smaller decline (or larger increase) in their bottom-up EPS estimates in Q4 2017 relative to their five-year averages, while nine of 10 sectors recorded a smaller decline (or larger increase) in their bottom-up EPS estimates in Q4 2017 relative to their 10-year averages. Thus, the smaller downward revisions to EPS estimates were broad-based across multiple sectors. Historical averages are not available for the Real Estate sector.

Four sectors actually recorded an increase in their bottom-up EPS estimate during the quarter, led by the Energy sector (+24.5%). On average, this sector has recorded a decline in the bottom-up EPS estimate during a quarter over the past five years (-15.6%) and over the past 10 years (-9.2%). The fourth quarter marked the largest percentage increase in the bottom-up EPS estimate for the Energy sector a quarter since Q3 2005 (+25.4%).

As the bottom-up EPS estimate for the index declined during the quarter, the value of the S&P 500 increased during this same period. From September 30 through December 31, the value of the index increased by 6.1% (to 2673.61 from 2519.36). The fourth quarter marked the 18th time in the past 20 quarters in which the bottom up EPS estimate decreased during the quarter while the value of the index increased over this same period.