CHART OF THE DAY: Falling Earnings Forecasts Is A Terrible Reason To Sell Stocks

Year after year, Wall Street’s stock market strategists are proven to be too optimist in their forecasts for earnings growth.

“Since 1976, the median year-over-year growth forecast in January for the full year ahead is 14%, but expectations on average decline throughout the year to closer to the 5% average EPS growth we have seen over that period,” wrote Morgan Stanley’s Adam Parker in a new note to clients.

“Analysts (and company managements) start the year optimistic and then adjust their optimism as the year progresses (Exhibit 2),” he continued. “Analysts often extrapolate or project incremental margin expectations that are excessively optimistic for many businesses.”

“What’s our point?” he asked rhetorically. “The market can work well even as the base case is being revised downward.”

Parker expects the S&P 500 to rally 12% to 1,840 over the next twelve months.

Stocks are up since 1976.

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