By: Mark Melin

The first two months of the third quarter have been negative from many perspectives. The S&P 500 (SPY) is in the midst of one of the worst corrections in history – a move that might not yet be complete. Amidst this turmoil, fundamental analysts have been, by and large, noting the strong numbers supporting their long positions as some wag their finger of disgust at algorithmic traders as causing the market sell-off. However, a report from FactSet might give those fundamentalists something to consider.

FactSet chart

Earnings per share estimates dropping with the stock market

Analysts dropped earnings estimates for companies in the S&P 500 for the quarter which, combined with steep losses for the S&P 500, isn’t good news for stocks – and is something that hasn’t happened since the fourth quarter of 2012.

Third quarter bottom-up earnings per share estimates, an aggregation of the estimates for all the companies in the index, fell by by 2.7 percent, to $29.25 from $30.06. “How significant is a 2.7 percent decline in the bottom-up EPS estimate during the first two months of the quarter?” FactSet’s Senior Earnings Analyst John Butters wondered.  “How does this decrease compare to recent quarters?”

The numbers are not positive for stock market bulls.

Historic perspective on earnings per share estimate drops

Butters observes that over the past four quarters, the average decline in the bottom-up EPS estimate during the first two months of the quarter has been 4.1 percent. Compare this along longer time horizons, such as the past five years. The 20 quarter average decline in the bottom-up EPS estimate during the first two months of the quarter was 2.5 percent. What’s more, the past 10 years, or 40 quarters, the average decline in the bottom-up EPS estimate during the first two months of the quarter has been 3.4 percent. “Thus, the decline in the bottom-up EPS estimate recorded during the course of the first two months of the third quarter was lower than the one-year average and the 10-year average, but slightly above the five-year average,” he noted.