For 2021, the bottom-up EPS estimate (which reflects an aggregation of the median EPS estimates for CY 2021 for all of the companies in the index) is $169.20. If $169.20 is the final number for the year, it will mark a record-high EPS number for the index. However, what is the likelihood that $169.20 will be the final EPS value for the S&P 500 in 2021? How accurate is the bottom-up EPS estimate one year in advance?
Over the past 20 years (2000 – 2019), 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 7.0%. In other words, industry analysts on average have overestimated the final EPS number by 7.0% one year in advance. Analysts overestimated the final value (i.e. the final value finished below the estimate) in 13 of the 20 years and underestimated the final value (i.e. the final value finished above the estimate) in the other seven 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.
However, this 7.0% 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%). These large differences can be attributed to events that may have been difficult for analysts to predict at the start of the year. In 2001, the country endured the 9/11 attacks. In 2008 and 2009, the country 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 be 1.9%.
The year 2020 is not included on this list yet, as the final EPS number for the year will not be available until February 28. However, it is likely CY 2020 will be included on this list going forward, as the current EPS estimate of $139.22 is 28% below the estimate of $177.60 at the start of the year due to the negative impact of COVID-19.
If one applies the average overestimation of 7.0% to the current 2021 EPS estimate (assuming the estimate changes little between now and December 31), the final value for 2021 would be $157.32. If one applies the average overestimation of 1.9% (excluding the years 2001, 2008, and 2009) to the current 2021 EPS estimate, the final value for 2021 would be $165.92. Based on these estimates, EPS of $157.32 would not reflect a new record-high EPS number for the S&P 500 (it would be below the EPS reported in both CY 2018 and CY 2019) while EPS of $165.92 would reflect a new record-high EPS number for the S&P 500.
However, it is important to note that there is a possibility that EPS estimates for CY 2021 will increase after the start of the year once there is more clarity around timetables for mass vaccinations for COVID-19. The current EPS estimate for 2021 of $169.20 is still well below the estimate of $196.70 at the end of CY 2019, which reflected expectations before analysts drastically reduced earnings estimates in the second quarter of 2020 due to the negative impacts of COVID-19. Will there be a corresponding drastic increase in earnings estimates assuming a vaccine is widely available in 2021?
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