Global Investing

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?

Slip slidin’ away

Thomson Reuters Research and Estimates finds that the blended growth rate for S&P 500 companies for the fourth quarter of 2008 now stands at -28.1 percent.  The blended growth rate combines actual earnings reported with estimates of those yet to come. What a decline.  On July 1st, the estimated growth rate for Q4 2008 was 59.3 percent; on October 1st, the estimated growth rate for Q4 2008 was 46.7 percent; and on January 1st, the estimated growth rate for Q4 2008 was -1.2 percent. If the final growth rate for Q4 2008 is -28.1 percent, it will mark the first time the S&P 500 has recorded six straight quarters of loss since Thomson Reuters began tracking earnings growth rates in 1998.

Zeitgeist check

– The estimated earnings growth rate for the S&P 500 for Q4 2008 currently stands at -1.2 percent. Six months ago, this was estimated at 59.3 percent.

– The price of oil was $37.71 at the close on December 26, the last formal price before Israel began its bombardment of Gaza. It has since risen close to 25 percent.

– A standout winner among investments last year was German stock volatility. The DAX New Volatility index rose more than 139 percent in 2008.

Earnings Outlook: Q3 forecast for S-P 500 is now negative

Downgrades to the profits forecasts for financials is driving the decline in earnings outlook for the S&P 500 stocks for the third quarter.

At this time, the estimated growth rate for Q3 2008 stands at -1.6%. On July 1st, the estimated growth rate was 12.6%. If the final growth rate for Q3 2008 is -1.6%, it will mark the first time the S&P 500 has recorded five consecutive quarters of negative earnings growth since Q1 2001 – Q2 2002.

The decline in the Q3 2008 growth rate during the past week (to -1.6% from 0.8%) can be attributed to downward estimate revisions to a number of companies in the Financials sector including Lehman Brothers.