S&P 500 companies may see a big cut in EPS estimates for the third quarter: Analysts

US stock market analysts make larger cuts to EPS estimates for S&P 500 firms for Q3.

S&P 500 companies may see a big cut in EPS estimates for the third quarter: Analysts
In a typical quarter, analysts usually reduce earnings estimates during the first month of a quarter.

Earnings, as reflected by Earnings per share (EPS) in the balance sheet, throw up a better picture of the fundamental strength of a company. Therefore, analysts keep track of quarterly earnings and keep an eye on the EPS growth rate for making investment decisions. Corporate Earnings, in turn, depend a lot on the economy’s growth and the factors influencing it. Inflation, interest rate, demand, supply concerns, and other external factors plays role in the financial performance of a company over a longer period of time.

The current economic conditions may not bode well for the companies at least in the short to medium term.

John Butters, Vice President and Senior Earnings Analyst at FactSet has come up with a research note showing how analysts are lowering EPS estimates more than normal for S&P 500 companies for the third quarter.

Given the decline in GDP for a second straight quarter, have analysts lowered EPS estimates more than normal for S&P 500 companies for the third quarter?

Also Read: S&P 1500 companies’ working capital returns to pre-pandemic levels: J.P. Morgan

The answer is yes. During the month of July, analysts 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 2.5% (to $57.98 from $59.44) from June 30 to July 28.

In a typical quarter, analysts usually reduce earnings estimates during the first month of a quarter.

During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.3%.

During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.8%.

During the past 15 years (60 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 2.1%.

During the past 20 years (80 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.7%.

Thus, the decline in the bottom-up EPS estimate recorded during the first month of the third quarter was larger than the five-year average, 10-year average, 15-year average, and 20-year average.

The third quarter also marked the largest decrease in the bottom-up EPS estimate during the first month of a quarter since Q2 2020 (-29.0%).

At the sector level, nine of the 11 sectors witnessed a decrease in their bottom-up EPS estimate for Q3 2022 from June 30 to July 28, led by the Communication Services (-9.6%) and Materials (-5.1%) sectors. On the other hand, two sectors recorded an increase in their bottom-up EPS estimate for Q3 2022 during this period, led by the Energy (+7.7%) sector.

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