The one group of people in markets who aren’t worrying about a recession
Earnings per share estimates are following a normal path ahead of the third-quarter reporting period, and 2025 profit forecasts are still going up.
Corporate profitability is tethered to consumer welfare.
When estimated earnings per share (or EPS, a key measure of a company’s profitability) are revised higher, it’s generally a sign of solid economic times: workers have more more money to spend, so corporations make more. Vice versa for negative revisions, which suggest an economic soft patch where people are reducing spending and profits slide.
Thus, when everyone in the market is supposedly worrying about a bleak economic outlook, as has been the case lately, we should expect to see more downward pressure of EPS estimates. But the latest data compiled by FactSet suggests that analysts think that the economy is poised to keep chugging along.
For all S&P 500 companies, bottom-up EPS estimates — that is, an aggregation of the company-by-company forecasts — for the third quarter of 2024 decreased by 2.8% from June 30 to August 31. These estimates go down heading into a reporting period, only for companies to then exceed expectations on a lowered bar. One quant once slammed earnings season as “cheating season” for this very reason.
But is a 2.8% cut to EPS estimates unusually large?
FactSet senior earnings analyst John Butters calculated the average decline of EPS estimates over the past 5, 10, 15 and 20 years and found that these ranged from 2.3% to 3.0%, meaning that the latest number sat fell around the middle of the range.
What’s more, expectations about the future further down the road are still getting sunnier. Butters also noted that while during the first two months of the quarter, EPS estimates for the third quarter dropped, analysts bumped up their EPS estimates for calendar year 2025 by 0.3%.
