With numerous industries in the U.S. forced to reduce capacity or close altogether due to social distancing policies implemented to help reduce the spread of the coronavirus, analysts made substantial cuts to earnings estimates for companies in the S&P 500 during the first quarter, particularly during the month of March. The Q1 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q1 for all the companies in the index) declined by 9.1% (to $36.97 from $40.68) from December 31 to March 31. How significant is an 9.1% decline in the bottom-up EPS estimate during a quarter? How does this decrease compare to recent quarters?
During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 3.2%. During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during a quarter has also been 3.2%. During the past 15 years (60 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.5%. Thus, the decline in the bottom-up EPS estimate recorded during the first quarter was larger than the five-year average, the 10-year average, and the 15-year average.
In fact, the bottom-up EPS estimate for Q1 witnessed the largest quarterly decline since Q1 2016 (-9.8%) and the eighth largest quarterly decline since FactSet began tracking this data in Q2 2002. However, it should be noted the decrease in Q1 2020 was much smaller than the declines of -34.3% and -31.3% recorded for Q4 2008 and Q1 2009.
At the sector level, 10 sectors recorded a decline in their bottom-up EPS estimate during the quarter, led by the Energy (-54.8%), Consumer Discretionary (-26.0%), Industrials (-25.3%), and Materials (-18.0%) sectors. Overall, seven sectors recorded a larger decrease in their bottom-up EPS estimate relative to their five-year average, seven sectors recorded a larger decrease in their bottom-up EPS estimate relative to their 10-year average, and seven sectors recorded a larger decrease in their bottom-up EPS estimate relative to their 15-year average.
As the bottom-up EPS estimate for the index declined during the quarter, the value of the S&P 500 also decreased during this same period. From December 31 through March 31, the value of the index decreased by 20.0% (to 2584.59 from 3230.78). The first quarter marked just the fourth time in the past 20 quarters in which both the bottom-up EPS estimate and the value of the index decreased the quarter.