Economic headwinds and tariffs are a likely culprit.
Wall Street analysts are lowering their sights when it comes to second quarter earnings, according to a recent analysis by FactSet.
In April, according to FactSet senior earnings analyst John Butters, analysts lowered their earnings per share (EPS) estimates for S&P 500 by a larger margin than usual. This is likely due to concerns about a slowing economy and the impact of tariffs on inflation and growth.
Specifically, the second quarter “bottom-up” earnings estimate decreased by 2.4%, falling to $63.96 on April 30, from $65.55 on March 31. The bottom-up EPS estimate, according to FactSet, is an aggregation of the median EPS estimates for Q2 for all the companies in the S&P 500.
Analysts typically lower or raise estimates based on several factors, including the economy or something company specific. And in the first month of a quarter – which April is for Q2 — earnings estimates are typically reduced. However, this decline is higher than average.
According to Butters, over the past five years, or 20 quarters, the average reduction in the bottom-up EPS estimate during the first month of a quarter has been 1.8%. Over the past 10 years, the average decline has been 1.6% — which is the same for the past 15 years. Over the past 20 years, the average decline bumps up to 1.9%.
So, the 2.4% drop last month is higher than the averages over the past five-, 10-, 15-, and 20-year periods. The last time the decline was this big in the first month of a quarter was Q4 2023 when it fell 3.9%.
Energy sees the largest decline in EPS estimates
In April, earnings estimates for nine out of the 11 sectors were lowered. Energy, by far, saw the biggest declines, with estimates dropping 14.8% on average between March 31 and April 30. Industrials were next, experiencing a 4.7% reduction in earnings estimates, followed by consumer discretionary at 4%.
Others showing declines are health care, down 2.8%; consumer staples and financials, both down 2.6%; materials, down 1.8%; real estate, down 0.4%; and communications services, down 0.2%.
The only two sectors that had earnings revised up were information technology, up 0.2%, and utilities, up 0.8%, according to FactSet.
For the first four months of the year, EPS estimates have declined by 3.1% to $265.68 from $274.12. That is on par with the five-year average, Butters said, but above 10-, 15-, 20-, and 25-year averages.
For the first four months, from December 31 to April 30, nine of the 11 sectors have seen earnings reduced, led by the energy (-14.9%) and materials (11.9%) sectors. Two sectors recorded an increase in their bottom-up EPS estimate, led by communication services (+1.4%). Financials also saw an increase of 0.2%.
This all suggests that analysts expect companies to make less money in Q2, likely due to economic and tariff headwinds. It could conceivably help companies beat or meet Q2 estimates, as they have have reduced expectations.
