S&P 500 Cos’ EPS estimates for Q3 lowered by 5.4% showing larger cuts than average | The Financial Express

S&P 500 Cos’ EPS estimates for Q3 lowered by 5.4% showing larger cuts than average

Analysts have lowered EPS estimates for the third quarter by a larger margin than average.

S&P 500 Cos’ EPS estimates for Q3 lowered by 5.4% showing larger cuts than average
At the sector level, nine sectors witnessed a decrease in their bottom-up EPS estimate led by the Communication Services and Consumer Discretionary sectors.

The Fed rate hikes are taking a toll on the stock market. The impact can already be seen in the recently announced quarterly results of companies. The implications of increasing interest rates are manifold in the economy and given the decline in U.S. GDP in the first quarter and the second quarter, several analysts are lowering EPS estimates more than normal for S&P 500 companies for the third quarter.

According to FactSet, during the months of July and August, analysts have lowered EPS estimates for the third quarter by a larger margin than average. The Q3 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q3 for all the companies in the index) decreased by 5.4% (to $56.21 from $59.44) from June 30 to August 31.

Lowering of EPS estimates is a regular feature but this time it is throwing up an interesting point. The decline in the bottom-up EPS estimate recorded during the first two months of the third quarter was larger than the 5-year average, the 10-year average, the 15-year average, and the 20-year average.

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If earnings are going to be lower as per the expectations, the impact on stock prices could be visible by next quarter’s end. Unless macroeconomic factors improve and company management delivers a stronger outlook in their guidance commentary, the stock market may remain volatile. Over the long term, it is the corporate earnings that matter the most.

At the sector level, nine sectors witnessed a decrease in their bottom-up EPS estimate for CY 2022 from June 30 to August 31, led by the Communication Services (-8.3%) and Consumer Discretionary (-6.9%) sectors. On the other hand, the two sectors witnessed an increase in their bottom-up EPS estimate for CY 2022 during this time, led by the Energy (+12.3%) sector.

It is interesting to note that the forward 12-month P/E ratio for the S&P 500 has increased to 16.7 from 15.8 since June 30, as the price of the index has increased by 4.8% while EPS estimates for CY 2022 and CY 2023 have decreased during this time.

Also Read: U.S. economy heading into a major economic downturn?

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