Why are analysts so wrong?
Is there something faulty about the way Wall Street analysts look at the companies they cover? Once again, with the latest quarterly earnings season about to end, the analysts have been wrong. This time, they have been way off the board wrong.
With 480 of the Standard & Poor’s index of 500 leading companies having reported, Thomson Reuters research has found that some 73 percent came in better than expected. Only 9 percent of consensus projections were right and 19 percent came in worse than expected.
To a certain extent, this is not suprising. The consensus heading into the latest quarter was made gloomy by the state of the world economy and a lot of stock market losses over the past couple of years. You can be over-pessimistic just as easily as you can be over-optimistic.
But the longer-term track record for analysts is not that much better than the latest offerings. Over the past eight quarters, 63 percent of companies beat estimates, 11 percent matched and 26 percent missed estimates.
So, two questions. Why are they wrong? And if they are so wrong, should anyone pay attention to them?