Narrowly focused company analysts are raising performance expectations for the businesses they follow while broadly focused market strategists and economists are lowering their estimates for market performance. One group is going to be wrong. David Dreman and many other value investors have demonstrated that there is a consistent over-optimism in corporate analysts’ estimates and Michael Mauboussin suggests we take a broadly focused outside view in our analysis. With the CAPE near all-time highs, my bet is that the strategists are correct and the company analysts are wrong. The odds are high that it will pay to be very selective and contrarian now.
Stocks Fall. Optimism Stands Tall.
The disconnect between analysts on the one hand and strategists and economists on the other comes largely because analysts are largely focused on their individual companies and industries. That gives them a deeper but narrower view than those who look broadly at macroeconomic factors. As both camps look to the end of 2011, they are seeing very different outcomes.
By JONATHAN CHENG
Stock analysts have a reputation for their rosy outlooks. But to many investors, that optimism may have just scaled new heights.
The U.S. economy has slowed noticeably in recent weeks, prompting economists to ratchet down their estimates for growth and investors to drive stocks down 7% since late April. Market strategists started reducing their year-end orecasts for the Standard & Poor’s 500-stock index.
Wall Street analysts are betting that earnings are going to remain high, even as the market falls and economists scale back their outlook on GDP growth, Marketbeat’s Mark Gongloff reports.
But individual stock analysts have remained noticeably upbeat.
As a group, they have not only kept their estimates for corporate earnings for the current quarter intact, but they have raised them.
Analysts expect S&P 500 companies, in aggregate, to earn $24.24 a share in the second quarter, according to Birinyi Associates. Those estimates have increased from $22.18 at the end of March and reflect a 16% rise from the same quarter last year.
Skeptics warn that analysts have set the bar too high, increasing the chances companies may disappoint, triggering more market turmoil.