Are EPS Revisions Heading Lower?

Currently the glass is half full, but don't expect it to stay that way

There is growing concern, with supporting data, that economic growth will decline, even if we do not have a full-blown recession. The latest inflation report indicated consumer prices rose 9.1% compared to last year. The Federal Reserve, which has already been raising interest rates in higher increments, is determined to bring down inflation at the risk of lowering economic activity. After Tuesday’s inflation report, there are already suggestions the Fed could raise rates by 1.0% at its next meeting.

One way to judge sentiment is by looking at sell-side analysts forecasts. They have the beat on the companies they cover and provide a view on their expected growth and earnings prospects.

At the end of the second quarter, the percentage of positive-to-negative EPS estimates was roughly 50/50 in our large cap universe. That means about half of analyst earnings estimates were upward changes and half were downward changes. The positive rate has been declining since the second quarter of 2021, when it reached its highest. This is explained by the pandemic’s influence. In 2020, estimates became very negative. In 2021, as the economy recovered and businesses reopened, there was a high percentage of positive revisions as growth was strong. Now, it is more challenging for companies to meet ever higher growth estimates.

The chart below shows the positive revision rate for our large cap universe by quarter dating back to 1996. The periods with the lowest rates (high percentage of negative revision activity) are seen during the aftermath of the Tech Bubble, during the GFC, and most recently the Covid pandemic. The average rate is approximately 50%, although the rate is usually passing through that level on its way up or down. A declining positive revision ratio is not meant to be a leading indicator. It measures analyst activity over the previous month or quarter.

Chart 1: Large Cap Universe Positive Revision Ratio
Line chart of positive earnings revision ration among large cap stocks

Source: S&P Global, Jackson Creek Investment Advisors. Jackson Creek large cap investment universe consists of a combination of the Russell 1000 and S&P 500 filtered by certain size, liquidity, and analyst coverage constraints.

The saying on Wall Street is that stock price moves precede earnings estimate changes. We can see this by looking at aggregate data on the S&P 500 Index. The index has declined about 20% year-to-date but there have not been any meaningful negative revisions to consensus EPS estimates. The following charts show consensus estimates for aggregate S&P 500 Index earnings per share from January to July 13th.

Chart 2a: S&P 500 Index EPS Estimates - FY 2022

S&P 500 FY 2022 EPS Estimates

Chart 2b: S&P 500 Index EPS Estimates - FY 2023

S&P 500 Index EPS Estimates - FY 2023

Source: S&P Global.

We obviously cannot predict (nor will we try) where estimates go in the coming quarters, but If expectations deteriorate and/or economic data worsens, EPS revisions should trend lower.