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Crystal balls

13 April 2020 By John Foley

Earnings will be grim, then get grimmer, then recover briskly. That’s the message from Wall Street analysts as companies prepare to disclose their first-quarter financial performances, with lenders JPMorgan and Wells Fargo due to report on Tuesday. Based on their track record, the stock-pickers are likely to be wrong.

Here’s how the next two years look for the S&P 500 Index, as predicted by sell-side analysts polled by Refinitiv. Profits will fall by 10.2% in the quarter that just ended, and then sink by a painful 22% the quarter after that. But that, the crystal ball-gazers currently reckon, is as bad as it gets. And by the end of 2021, the S&P 500 will have generated 7% more net profit than in 2019.

Reassuring as that sounds, there are two problems. The first is that analysts are pretty middling at predicting how companies will perform beyond the next quarter. Each January over the past ten years, their estimates of the coming year’s earnings growth have later turned out to be wrong by an average of 7 percentage points. And the range is wide. In 2010 and 2015, they missed the mark by roughly one-fifth, first aiming too low, then too high.

Estimates get more accurate as earnings disclosure comes closer. But then a different problem kicks in: a penchant for too-cautious numbers that companies mostly beat. Over two-thirds of S&P 500 firms exceed consensus earnings estimates each quarter – a margin that has barely changed in a decade. Companies may like to keep expectations tactically modest to analysts who’d rather look cautious than keen. Still it hardly bolsters their predictive credibility.

The market is already pessimistic. The S&P 500 Index has fallen by a fifth in two months, suggesting investors think around 20% of all future corporate cash flows have disappeared or that companies have become inherently more risky. Either way, it’s more than a bad couple of quarters. With analysts struggling to see more than three months in advance, investors facing a yearslong economic adjustment will need to rely on a different group of forecasters.


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