Investors often turn to Wall Street analysts for guidance regarding corporate earnings growth. Earnings and expectations for earnings growth are at the core of equity valuations and therefore critical in the investment decision-making process.
Unfortunately, analysts are not very accurate when it comes to forecasting earnings.
“[A]nalysts are usually too bullish on corporate profits,” Citi’s Robert Buckland wrote. “Figure 9 shows initial estimates and eventual outcomes for consensus global EPS growth forecasts going back to 1988. In only five years (1988, 1999, 2003, 2004 and 2010) were analyst forecasts too low. In every other year they were too high. In fact, the “median miss” was 7%. Since underestimating the EPS rebound of 2010, the average annual miss has been 8%. Given that analysts started forecasting 12% EPS growth for 2015, this would suggest a reduction to 5% is perfectly normal.”
While analysts tend to be too optimistic, they will also sometimes find themselves on the overly cautious side.
Regardless, it’s probably best not to put too much into the one-year forecast of a Wall Street equity analyst.