These Squiggly Lines Remind Us That Wall Street Analysts Are Terrible At Forecasting Earnings

Earnings season kicks off this week.

As usual, investors should prepare for some volatility as companies do their best to beat analysts’ expectations.

It’s worth noting, however, that those expectations tend to be very inaccurate. Furthermore, analysts will revise their forecasts dramatically as more information comes in.

In almost every quarter since the financial crisis, we’ve seen estimates gradually reduced. Deutsche Bank’s David Bianco presents this chart of analysts’ evolving quarterly earnings expectations.

“Given sharp cuts in analyst estimates this quarter, 2/3rds of S&P companies should beat with an avg. EPS beat of 3% to 5%,” speculated Bianco.

Counterintuitively, stock prices have only been rising during these periods of reduced earnings expectations. This can partially be explained by the fact that most investors have actually expected estimates to come down. Barclays’ recently asked its clients by how much and in what direction they expected analysts to adjust their earnings estimates. As you can see in the bar chart below, most were expecting negative revisions.

For some historical context, strategist Gerard Minack published this chart a while back. It shows evolving earnings expectations since 1986. As you can see, the expectations are never static, and they’re almost always way off when they’re first published.

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