Chart Focus: A generation of overoptimistic equity analysts

Chart Focus Newsletter
July 2010

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A generation of overoptimistic equity analysts

McKinsey research shows that equity analysts have been overoptimistic for the past quarter century: on average, their earnings-growth estimates—ranging from 10 to 12 percent annually, compared with actual growth of 6 percent—were almost 100 percent too high. Only in years of strong growth, such as 2003 to 2006, when actual earnings caught up with earlier predictions, do these forecasts hit the mark.

The capital markets, by contrast, have been more realistic: except during the 1999–2001 market bubble, actual price-to-earnings ratios were 25 percent lower than those implied by the forecasts of analysts. To learn more about this research, read “Equity analysts: Still too bullish” (April 2010).

Also of Interest

March 2005
Do fundamentals—or emotions—drive the stock market?
“Irrational exuberance” (or fear) can drive market behavior in a few short-lived situations. But the basics still rule. [includes audio]

March 2005
Measuring long-term performance
Earnings per share and share prices aren’t the whole story—particularly in the medium and long term. [includes audio]

August 2003
Taking stock of equity analysts
The research business is sick. Only better, less expensive information will cure it.

October 2001
Prophets and profits
Executives shouldn’t bend strategy to the wayward long-term earnings forecasts of equity analysts.

Did you miss last month’s Chart Focus?

“Forecasting the supply of doctors”
Few health care systems accurately forecast how many different kinds of doctors they will need. New techniques, for example, have cut demand for bypass surgery—and the surgeons who perform it. The UK saw this trend late, so the average number of operations they undertake fell by 88 percent from 1998 to 2007.