Analysts Missed the Downturn: Can They Be Trusted Now?

If you've ever distrusted the earnings estimates of stock market analysts, it looks like you've had good reason to be skeptical.

The following chart shows an interesting pattern. At the top left, we see global stock prices plunging roughly three months before earnings estimates began to come down. Doesn't inspire confidence in analyst opinions, does it?

Now take a closer look at the lower right hand corner of chart. Here we see prices and estimates playing out the same way, only in reverse. In other words, prices are heading up and analysts are only now, three months after the trough in prices, beginning to raise earnings estimates.

How to play it --

Citigroup has looked at global estimates divided them into two buckets: developed world and emerging world. You can see the results in this next chart:

It is clear that analyst expectations for emerging market stocks are much rosier than their expectations for stocks in developed economies.

Conclusion --

Stock prices are leading analyst estimates again, this time in a positive direction.

The charts above show that earnings estimates, in aggregate, provide something like a smoothing function to underlying price action. Estimates lag prices by roughly three months and don't exhibit as much volatility as prices. This interaction of prices and estimates does seem to mark turning points in the stock market.

Worried that you've already missed a big part of the rally? Then go where the expected earnings momentum is highest: emerging markets. There's still time to go out and buy an emerging market ETF . Here is a quick list to get you started:

• iShares MSCI Emerging Markets Index Fund (EEM)
• PowerShares FTSE RAFI Emerging Markets Portfolio (PXH)
• SPDR S&P Emerging Markets ETF (GMM)
• Vanguard Emerging Markets ETF (VWO)
• ProShares Ultra MSCI Emerging Markets (EET)

Sources:

This post is based on an article in Toronto's Globe and Mail.

Disclosure: no positions

Comments

[notsosmart:]

dont trust anybody.think for yourself. all have an agenda & its not filling your pocket.

Sep 22 01:07 PM

[The Recusant:]

notsosmart --- I don't think that most do it for greedy reasons at other's expense. They just don't see the bigger picture and are limited by their reliance on internal indicators. They seem to forget that the market and indicators are but the foam on the top of the wave. And foam can be blown away from where the wave is headed.

Sep 22 01:28 PM

[JPDX:]

I've never believed the analysts. The analysts are the market. If you listen to them you will never beat the market. I found a good strategy is to do the opposite of what they recommend as long as 'you' have done the research yourself.

Sep 22 05:01 PM