Tuesday, April 18, 2006

"Analyst's Estimates" of Corporate Earnings

I've been following financial markets for nearly 15 years by now, and one thing I've noticed is how every quarter, every year it have been the case that actual published earnings have on average exceeded "analyst's estimates", at least in America. And with earnings season now starting, I can bet you a million dollars it will be the case this quarter again. And the next quarter. And the quarter after that and so on. A majority of companies will have headlines showing their earnings to be better than the so-called estimates. A minority will "meet estimates" and a handful will have "lower than expected" earnings. But again, most will have "better than expected" earnings and on average actual earnings will be higher than the so-called estimates.

This does not necessarily imply that earnings are good per se, or even that current earnings will be better than what those analysts forecasted a year ago earnings will be now (In fact, studies have showed that on average analysts overestimate what earnings will be a year from now). It's just that it is alway the case that the published earnings will on average be higher than the so-called estimates are just before they are published.

This consistent error could indicate two things.
1) The so-called analysts are grossly incompetent.
2) The so-called analysts are dishonest, and are trying to create a artificial impression of good news, by downwardly adjusting their "estimates" just before publication so that the headlines will always be mostly about "better than expected" earnings, a illusion they have an economic self-interest in, since this would make more people buy stocks something which they as brokerage houses would make money on.

Both of these explanations are possible and it could of course be a combination, but I am quite frankly more inclined to believe in the latter.


Anonymous Andreas Johansson said...

Or it could because they don't want to be accused of touting the merits of a companys stock on false grounds.

7:58 PM  
Blogger Ken said...

Blame it on the Keynesians !!!
It's a conspiracy to have the general public remain optimistic and with greater expectations for the future - fuel the greed of the Capitalists further.

6:57 AM  
Blogger Martin said...

I've gotten the impression that many business leaders prefer to err on the cautious side as well, and given that they possess superior information to that of analysts, it's likely - to some extent - their fault as well.

Although over time one would expect that analysts - were they completely rational - would correct this bias.

6:09 PM  
Anonymous davidcooper@verizon.net said...

Very good commentary. I'm still at a loss to find some source where analysts' estimates of earnings about to be announced can be reviewed. I would like to find some source to see what the predictions are so that I and other investors might make a more informed judgment as to whether to invest before an announcement or anfterward. If you have any thoughts along this line, I would certainly hope you could share them with me. Kind regards. David Cooper Los Angeles

9:56 PM  

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