Earnings Consensus has Benjamin Button Disease

This is one of the more hilarious charts documenting the impossibility with which price targets and market forecasts are made each year by Wall Street’s analyst community.

Here’s a Morgan Stanley chart via @ukarlewitz of Fat Pitch Financial:



In other words, analysts’ earnings forecasts are, on average, more than 50% higher than where they should be at the beginning of each year. Then, as reality takes hold, they mean-revert down to where they belong.

This data squares with what Morgan Stanley’s outgoing strategist, Gerald Minack, admitted about his colleagues on his way out the door…

First, they are almost always wrong – almost always because they are too high. The initial forecast has been too low only twice in the history of this series; otherwise, it was too high. On average, the forecasts have been 61⁄2% too high one year ahead (that is, actual EPS were on average 61⁄2% below the EPS forecast a year earlier). The average error two years ahead has been 111⁄4%.

Second, forecasts for growth rates are also typically too high, with a larger error than for EPS levels. On average, forecasts have implied 151⁄2% EPS growth over the next 12 months; on average, EPS have risen 71⁄2%.

Minack’s chart is also a gem:

eps forecast 2


Baseline expectations for corporate earnings can be helpful – just don’t get too excited about the outlook early in the year.

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. bitcoin trading software commented on Sep 23

    … [Trackback]

    […] Read More Info here on that Topic: thereformedbroker.com/2013/11/25/earnings-consensus-has-benjamin-button-disease/ […]

  2. immediate edge review commented on Sep 29

    … [Trackback]

    […] Read More on that Topic: thereformedbroker.com/2013/11/25/earnings-consensus-has-benjamin-button-disease/ […]

  3. cum se trateaza commented on Oct 30

    … [Trackback]

    […] Find More here to that Topic: thereformedbroker.com/2013/11/25/earnings-consensus-has-benjamin-button-disease/ […]

  4. Digital transformation commented on Nov 13

    … [Trackback]

    […] Read More on to that Topic: thereformedbroker.com/2013/11/25/earnings-consensus-has-benjamin-button-disease/ […]

  5. td easyweb banking commented on Dec 05

    … [Trackback]

    […] Read More Info here to that Topic: thereformedbroker.com/2013/11/25/earnings-consensus-has-benjamin-button-disease/ […]

  6. 토토사이트 commented on Dec 25

    … [Trackback]

    […] Read More to that Topic: thereformedbroker.com/2013/11/25/earnings-consensus-has-benjamin-button-disease/ […]

  7. rolex replica commented on Jan 01

    … [Trackback]

    […] Read More on on that Topic: thereformedbroker.com/2013/11/25/earnings-consensus-has-benjamin-button-disease/ […]

  8. wigs for women commented on Jan 14

    … [Trackback]

    […] Find More to that Topic: thereformedbroker.com/2013/11/25/earnings-consensus-has-benjamin-button-disease/ […]