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As of June 3, FactSet reports, analysts had cut their earnings estimates during the first two months of the quarter for second quarter earnings by companies in the Standard & Poor’s 500 by 1.3% to $55.36 from $56.06. How significant is that? And what does it tell investors about the second quarter?

On the one hand, it’s not especially negative. Analysts typically reduce their earnings estimates in the first two months of every quarter. During the past five years (that’s 20 quarters), the average decline in the S&P 500 earnings estimate during the first two months of a quarter has been 1.9%. During the past 10 years (40 quarters), the average decline has been 2.7%.

In other words, compared to “business as usual” the decline in an analyst estimates has been smaller than usual.

On the other hand, the decrease in second quarter estimates marked the largest decrease in the bottom-up EPS estimate during the first two months of a quarter since the second quarter of 2020. The decrease that quarter was a whopping 35.9% as Pandemic lockdowns ravaged the U.S. economy.

Looking at the decrease in projections sector by sector, seven of the 11 S&P sectors saw a decrease in their earnings estimate for the second quarter in the period from March 31 to May 31. The biggest decliners in estimates were in Consumer Discretionary (-15.8%) and Communication Services (-7.3%) sectors. Four sectors saw an increase in their earnings estimates led by the Energy (+29.4%) and Materials (+8.7%) sectors.

My conclusion?

The big increases estimates for energy and materials disguise the extent of the drop in estimates for other sectors. The gains for energy and materials in the quarter have more to do with the continued supply shortages resulting from the sanctions against Russia due to the war in Ukraine and to a recovery in demand from China as the country loosens Pandemic lockdowns than with strong growth in the general economy. Earnings estimates in most sectors look poised for further downgrades as we get close to the June 30 end of the quarter. There are just a lot of cost surprises lurking out there. And I’d doubt that analysts are going to go out on a limb with big increases in estimates and leave themselves open to second guessing when there’s that much uncertainty out there.