A May 1st report from FactSet Insight highlights that the S&P 500 stock index continues to move up despite the fact that analysts have been reducing earnings estimates for some months now. As ValueWalk reported earlier, the key question is how much longer can this seemingly anomalous situation go on.

Stock analysts keep reducing estimates for S&P 500

FactSet Senior Earnings Analyst John Butters points out that during the month of April, analyst consensus earnings estimates for firms in the S&P 500 were down for the second quarter. Of note, the second quarter bottom-up EPS estimate (an aggregation of earnings estimates for all the companies in the index) slipped by 1.9% (to $28.83 from $29.39) last month.

S&P 500

Prices, up EPS estimates down is the new normal

On the other hand, the value of the S&P 500 was up by 0.9% (to 2085.51 from 2067.89) in April. Moreover, this was the ninth time in the last 16 quarters that the bottom-up EPS estimate was down while the price of the index was up in the first month of the quarter.

S&P 500

Historical perspective on EPS estimates

Over the last year, the average decline in the bottom-up EPS estimate in the first month of the quarter is around 2.6%. Over the last five years, the average decline in the bottom-up EPS estimate during the first month of the quarter is 1.3%. Over the last last 10 years, the average decline in the bottom-up EPS estimate during the first month of the quarter is 2.0%. That means decline in the bottom-up EPS estimate noted in the first month of the second quarter (ie, April) was below the one-year average and the 10-year average, but still above the five-year average.

Energy sector finally showing signs of stabilizing, but is literally off the charts

S&P 500

Butters also highlights that the decline in the bottom-up EPS estimate so far in the second quarter is also below the decline in the bottom-up EPS estimate in the first month of the first quarter (-6.2%). That said, the decline recorded during the first month of the first quarter was the largest percentage decrease in the bottom-up EPS estimate for the first month of a quarter since the first quarter of 2009 (-20.2%).

JPMorgan also has an interesting study on the topic and because a picture is worth a thousand words check out the chart below.

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It is important to note that the difference between the EPS estimate declines for the first quarter and the second quarter can be largely attributed to the energy sector. In the first month of Q1 2015, the bottom-up EPS estimate for the energy sector dropped by a shocking 44.5%. During the first month of Q2 2015 (April), the bottom-up EPS estimate for the energy sector slipped by a mere 4.8%.