From FactSet’s John Butters:
Strategists and Analysts in Near Agreement on 2016 EPS
Smallest % Difference Between Bottom-Up EPS and Top-Down EPS in 10 Years
While the bottom-up EPS estimate for 2016 was $126.94 on December 31, the top-down mean EPS estimate (which reflects the average of the index-level EPS estimates submitted to FactSet by 7 market strategists) for 2016 on that date was $126.88. Thus, bottom-up EPS estimate was just 0.05% higher than the top-down mean EPS estimate at the start of 2016. By how much do the industry analysts and the market strategists normally disagree at the start of a new year in terms of EPS projections? Is 0.05% an unusually narrow spread?
Over the past 10 years, the bottom-up EPS estimate has been 1.2% higher than the top down mean EPS estimate on average at the start of a year. Thus, the 0.05% spread for 2016 is well below the average of the past ten years. In fact, it is the lowest spread during this period (2006 — 2015).
Which group has been more accurate in predicting the final (bottom-up) EPS number for each year? FactSet has historical estimates for both groups going back to 2006. This window includes the years 2008 and 2009, which were years in which both the industry analysts and the market strategists vastly overestimated the final EPS for these years, which skews the averages for both groups.
From 2006 — 2014, the industry analysts overestimated the final bottom-up EPS number in six years and underestimated the final bottom-up EPS number in three years. The average difference between the bottom-up EPS estimate at the start of the year and the final bottom-up EPS number was +8.2%.
Over this same period, the market strategists also overestimated the final bottom-up EPS number in six years and underestimated the final bottom-up EPS number in three years. The average difference between the top-down mean EPS estimate at the start of the year and final bottom-up EPS number was +7.7%.