Picture du Jour: A generation of overoptimistic equity analysts

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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.”

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.

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