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.”
In this article
- Are EPS Forecasts Too Optimistic?
- Fidelity to Stop Offering Class B Shares
- New Rules for Target Date Funds
- Uncertain Dividend and Capital Gains Taxes
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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).
As mentioned in the June 10, 2010, AAII Investor Update e-mail newsletter, Goedhart’s research is notable because analysts were raising their forecasts for full-year earnings. The consensus estimate projected 2010 S&P 500 earnings at $81.29 per share at the time. This represented a 4% upward revision from the average forecast of three months prior.
The positive revisions held this spring despite worries about the European debt crisis and potentially slower economic growth in the United States. In fact, as the market corrected in May and early June, analysts remained optimistic about full-year earnings.
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