I have long been of the opinion that equity analysts are generally too optimistic on earnings forecasts. Research by McKinsey & Company now offers rather compelling evidence in a paper entitled Equity analysts: Still too bullish (registration required to access the full report).
The report shows that
analysts have been overoptimistic for the past quarter century: on average, their earnings-growth estimates – ranging from 10–12% annually, compared with actual growth of 6% – were almost 100% too high. Only in years of strong growth, such as 2003 to 2006, when actual earnings caught up with earlier predictions, do these forecasts hit the mark.
Click charts to enlarge:
Source: McKinsey & Company
Source: McKinsey & Company
The nagging question, of course, is whether earnings forecasts, especially those used for one- and two-year prospective P/Es, are again too optimistic. Many bullish stock market arguments are based on these.
