Sunday, October 30, 2011

Beating Analyst Estimates Means Very Little (Apparently)

Beating Analyst Estimates Means Very Little (Apparently)
An interesting chart was posted showing the number of S&P 500 companies "beating" analyst estimates.

As seen below, the number of "beats" has trended significantly higher over the past 20 years. So much so, that even in third-quarter of 2008 when the US market experienced one of the largest one-quarter shocks since the Great Depression, nearly 58% of companies still managed to "beat expectations".

Ironically, as more and more companies have beaten expectations, actual equity market performance has been abysmal (for more than a decade). Perhaps we can go back to the good old days of the mid 1990's when fewer companies met analyst estimates and their stocks performed strongly anyway.  

Conclusion- While various studies have shown that changes in earnings expectations generate abnormal returns, the charts below suggest there is little value in trying to predict whether companies will beat analyst expectations (since most of them do "beat" consistently and the long-term market impact is negligible.

20-year S&P Chart

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