SP 500 EPS Estimate Revisions: What is it About the First Quarter in Terms of Earnings Weakness ?

When this blog post was written about a month ago, the SP 500 EPS estimate revision data was exhibiting the kind of negative revisions that have been previously seen in first quarters since I began tracking the data in the 4th quarter, 2009.

In other words, when there has been “weakness” in SP 500 EPS estimate revisions, meaning when EPS revisions over a quarterly earnings period remain more negative than positive, or when negative revisions exceed positive revisions for a quarterly earnings period, it tends to typically happen with the 4th quarter’s earnings reports.

Here is some data for readers to explain what is meant by all this:

  • Since the data began being tracked in Q4, 2009, (the estimate revision data for the SP 500 is published weekly by I/B/E/S by Refnitiv) there have been 37 quarters of earnings reports for SP 500 companies;
  • Of those 37 quarter’s, 7 have seen an entire reporting period (usually January 10th through April 15th or April 10th through May 15th) where¬† positive SP 500 estimate revisions never had one week that exceeded 49% positive revisions, or in other words, an entire quarterly earnings period saw more “negative” revisions than positive revisions;
  • Of those 7 quarterly earnings periods where negative revisions exceeded positive revisions for the entire period, 6 (!) of the 7 periods occurred from the January 10th to the February 15th time frame, or basically the 4th quarter earnings reports with the first pass at annual guidance for the coming 12 months.

Are Street analysts unusually conservative with their first quarter and full-year earnings estimates ? That could be, particularly if like this year we had the -13% return for the SP 500 in calendar Q4 ’18 and then Street analysts had to factor in the Q4 ’18 government shutdown.

Here are some thoughts on previous first quarter weakness and ultimately how the year unfolded:

  • Q1 ’13: positive revisions in Q1 ’13 never rose above 47% but the subsequent quarters improved and the SP 500 returned over 30% in 2013;
  • Q1 ’14: Russia invaded Ukraine and the Venezuelan peso devalued, but subsequent quarters improved and the SP 500 returned 13.69% in 2014;
  • Q1 ’15: crude oil plummeted starting in late ’14, and the dollar strengthened dramatically from late ’14 to early ’15. While estimates turned positive for the rest of the year, the SP 500 returned just 1.4% in 2015;
  • Q1 ’16: crude falls to $28 per share, the Fed raised rates in Q4 ’15 and WalMart guided lower. SP 500 bottomed in Q1 ’16 returning 12.5% that year;
  • Q1 ’17: There was one single week where “positive” revisions exceeded 50% so this quarter didn’t qualify as a negative quarter.
  • Q1 ’19: No need to explain recent events to readers in terms of the current market environment;

Summary / conclusion:¬† People seem to forget analysts are people too, and that since 2008, the tendency to predict “the sky is falling” seems to pervade the full-year outlooks at the start of every year, only to lead to positive SP 500 returns down the road once the Street starts to see that – well – SP 500 earnings aren’t that bad.

In each of the above years, highlighted by the above bullet points, the first, second and third quarters resulted in SP 500 reporting periods in excess of 50% positive revisions.

The current “bottom-up” estimates for SP 500 earnings growth in 2019 is for 4%.

My own original expectation was for 12% – 13% and I still think that 2019 could be a “double-digit” SP 500 eps growth year.

4th quarter earnings estimates have remained relatively firm at 9% – 10% (so far).

This tarp has been set before in terms of weak outlooks to start the year and then only to see a pretty decent year in terms of both SP 500 earnings growth and positive revisions.

Thanks for reading today, but I needed to clean up that late January ’19 post and fill in the history.

The post was a little more “academic” than was intended.

 

 

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