Earnings expectations revisions are worthless information

You’d think that when Wall Street experts cut expectations for earnings, stock prices would fall.

But that simply hasn’t been true. And it hasn’t been true for decades.

That brings us to this classic chart from Morgan Stanley’s Adam Parker, averaging the trajectory of analysts’ earnings growth expectations for every year since 1976.

“Typically, analysts follow a pattern of persistent downward revisions,” Parker said. “In fact, on average, the bottom-up estimates for earnings growth gross up to 14% in January of a given year, and fall to 6%, the actual growth rate, by year-end. Investors know this and don’t necessarily care that the base case has to be downwardly revised.”

The S&P 500 kicked off 1976 at around 90. And today it trades at around 2,100. In other words, stock prices have been going straight up despite negative revisions.

It’s interesting to see trends in these revisions. But it’s important to note that revisions in forecasts reveal more about the analysts than the markets they’re covering.

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