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Posted 07/21/2010 By Matt Stichnoth

REPORT: THE SELL-SIDE IS AS BAD AT PREDICTING EARNINGS AS EVERYBODY SUSPECTED

Duh! Sell-side analysts are chronically over-optimistic:

Research published by McKinsey & Company this morning lays out in black and white what many have long suspected – that equity analysts consistently overestimate the future earnings growth of the companies they cover.

The consultant found that over the past 25 years, average earnings-growth estimates of 10-12% for companies in the S&P 500 were almost 100% too high. Average actual growth over the period was closer to 6%.

Authors of the report, titled ‘Equity analysts: Still too bullish,’ said: “Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.”

This tendency for optimism is reflected by the fact that analysts forecast growth of more than 10% for 70% of companies in the US index. [Emph. added]

The chart tells the tale:

10:57 AM

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