For 2018, the bottom-up EPS estimate (which reflects an aggregation of the median EPS estimates for all of the companies in the index) for the S&P 500 is $146.17. If $146.17 is the final number for the year, it will mark a record-high EPS number for the index. However, what is the likelihood that $146.17 will be the final EPS value for the S&P 500 in 2018? How accurate is the bottom-up EPS estimate one year in advance?
Over the past 20 years (1997-2016), the average difference between the bottom-up EPS estimate at the beginning of the year (December 31) and the final EPS number for that same year has been 8.6%. In other words, industry analysts on average have overestimated the final EPS number by 8.6% one year in advance. Analysts overestimated the final value (i.e., the final value finished below the estimate) in 15 of the 20 years and underestimated the final value (i.e., the final value finished above the estimate) in the other five years. For the purposes of this analysis, the final EPS number for a year is the EPS number recorded two months after the end of each calendar year (February 28) to capture the actual annual EPS results reported by most companies during the fourth quarter earnings season.
Applying the Overestimation
If we apply the average overestimation of 8.6% to the current 2018 EPS estimate (assuming the estimate changes little between now and December 31), the final value for 2018 would be $133.66.
However, this 8.6% average includes three years in which there were substantial differences between the bottom-up EPS estimate at the start of the year and the final EPS number: 2001 (+36%), 2008 (+43%), and 2009 (+28%). In 2001, the U.S. endured the attacks of September 11. In 2008 and 2009, the U.S. was in the midst of economic recession. If these three years were excluded, the average difference between the bottom-up EPS estimate one year prior to the end of that year and the final EPS number for that year would have been 3.7% (over the past 20 years).
If we apply the average overestimation of 3.7% (excluding the years 2001, 2008, and 2009) to the current 2018 EPS estimate, the final value for 2018 would be $140.69.
Based on estimates as of today, EPS of $133.66 or $140.69 in CY 2018 would reflect a record-high for the S&P 500.