Briefly Noted

Are EPS Forecasts Too Optimistic?

Marc Goedhart of McKinsey & Company suggests that analysts might be too hopeful when making market forecasts. In a new report, he spared no punches by opining, “Analysts typically lag behind events in revising their forecasts to reflect new economic conditions.”

Goedhart and his colleagues estimate that over the past 25 years, analysts have forecast growth of 10% to 12% per year, while actual earnings only grew at a 6% pace. The margin of error was wider when economic growth slowed and narrower when economic growth accelerated. Notably, actual S&P 500 earnings coincided with forecasts in 1998, 1994–1997 and 2003–2006 (see the graph).

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