Sharpest cuts to EPS estimates for S&P 500 companies since Q1 2009

With the end of the fourth quarter, it marks a good time to measure downward revisions to estimates for S&P 500 companies.  The bottoms-up EPS estimate for the fourth quarter fell 6% during the quarter.  This decline was higher than the numbers recorded in Q3 2011 (-4%) and Q2 2011 (-5%), and marked the largest percentage decrease in the bottoms-up EPS estimate for the index since Q1 2009 (-31%). However, it is interesting to note that while estimates fell 6% during the quarter, the price of the index actually increased 12% over the same time frame.

Corporations have also significantly tempered expectations for earnings growth, as 82 companies have issued negative EPS preannouncements for the current quarter.

Although Alcoa’s earnings release traditionally marks the start of each quarterly earnings season, about 20 to 25 companies in the S&P 500 report earnings prior to Alcoa’s release during the “pre-season.”  Of the 21 companies that reported earnings for Q4 2011 during the month of December, just 57% reported actual EPS above estimates. This marked the first “pre-season” since Q1 2009 (59%) that the percentage of companies beating EPS estimates was below 60%. However, there has been little correlation in recent years between the “pre-season” earnings scorecard and the final earnings scorecard.

Over the past week, the Q4 2011 earnings growth dropped to 11.8% from 11.9% due to downward revisions to EPS estimates for Sears Holdings. If the final earnings growth rate is 11.8%, it will mark the ninth consecutive quarter of double-digit earnings growth for the index. The Financials sector is predicted to have the highest earnings growth rate (76%) and be the largest contributor to dollar-level earnings growth.  However, one company accounts for almost all of the growth in the Financials sector and more than half of the growth for the entire index: AIG.  If AIG is excluded from the index, the Q4 2011 earnings growth rate for the S&P 500 drops by more than 50%, from 11.8% to 4.4%.  Comparisons to weak year-ago earnings are driving the unusually high dollar-level growth for AIG.

During the upcoming week, six companies in the S&P 500 are scheduled to report earnings for the fourth quarter. The “unofficial” start of the Q4 2011 earnings season will take place the following week, as Alcoa is schedule to release results on January 9.

Read more about expectations for Q4 2011 in this week's edition of FactSet Earnings Insight.

All of the data used to compile FactSet Earnings Insight is available in the FactSet workstation.