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« Weighing the Week Ahead: Have Stock Investors Dodged the (Correction) Bullet? | Main | Weighing the Week Ahead: It’s All about Earnings »

July 18, 2013

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Chris Tinker

Surely forward expectations are a function of known information, so far from being reactionary in a negative way, a consistent set of forward looking earnings continue to be precisely that. To the extent that the market is limited in terms of predicting the unknown it will tend to operate with a consensus driven by close consultation with the company concerned and a reasonably detailed knowledge of the industry involved.
If you want Analysts to forecast 200 of the next 3 corporate reporting shocks then by all means go for the outlier mindset, but as the best disseminator of market expectations over what a company can be expected to deliver ( and hence what one should be prepared to pay for it) they remain the best resource available.
As far as predicting trend changes, well that involves using the analyst forecasts in a predictive model for the share price - that is a different ball game.

Reader

The problem with using forward earnings estimates to predict market performance is that the estimates tend to be reactionary rather than predictive. The Factset chart clearly shows that the estimates change their trend AFTER the market does. Analysts are very good at telling us what has just happened, but because its safer to stick with the majority than to look like a fool by making an extremely inaccurate prediction, the majority always just stick with the current trend until the market tells them to do otherwise. As a result, their forecasts have no predictive power.

oldprof

Fellow Jeff Miller -- and not a pseudonym!

Whether the record is good or not depends on the difficulty of the problem and how you are using the data. I pointed out that it was within 10% in nearly all of the years. I think this is a fine record, but I invite anyone to provide a better source.

I am trying to see your point in the data, but it does not quite fit with my own experience in watching this for a long time. The estimates really fail when we have an official NBER declared recession. Otherwise they are generally too low. If that is what you are observing, then I agree.

I certainly agree that we need to know the economic context -- especially whether a recession impends.

Thanks for joining in!

Jeff

oldprof

George -- I intentionally chose not to use absolute values since I wanted to demonstrate that the alleged bullish bias was not correct.

Looking at standard deviation or absolute error would make sense if we had anything to compare it with. Since no one else puts out a long-term track record, that makes it difficult.

Jeff

George Gagliardi

Sorry, but the mean and median figures are meaningless unless you take the ABSOLUTE VALUE of the errors rather than their actual value. Sloppy mistake to make.

"Jeff Miller" (but not the author)

Jeff: Interesting article ... but that 0.6% error isn't so great when standard deviation is 13.3%. In fact one could argue it is misleading. Of more importance and overlooked is that the Thompson Reuters estimates consistently are under during earnings upswings and consistently over during earnings downswings. Having a grasp of the overall economic picture will do more for understanding the context of the earnings estimates than that single error number suggests.

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