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Forward Earnings are Opinions

Posted By Barry Ritholtz On March 22, 2005 @ 2:06 pm In Investing,Markets | Comments Disabled

Doug Kass over at Street Insight [1] mentions that:

"With economic tailwinds now becoming headwinds, one can only infer economists’
and strategists’ corporate profit estimates for 2005 are far too high as a
decelerating economy (especially at the consumer level), rising cost pressures
(especially at the energy level) and the inevitable ramification of the twin
deficits of mass destruction will lead to lower growth forecasts. Stated simply,
it is unlikely stock prices can move up in a sustained manner until general
growth expectations are lowered."

Funny, I was just discussing today the historical tendency of analysts to overestimate forward earnings — regardless of the economic conditions. You can see this over optimism quite graphically represented via Doc Yardeni [2]:

click for larger chart

Spx_over_optimism_yardeni305 [3]

It bears repeating:   Forward estimates are not data, they are opinion . . .

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Update I: March 22, 2005 10:54am

Yes, you can aggregate all these opinions, and collectively, they are data. While technically correct, that missess the main point: Overreliance on these opinions is usually an expensive error.

>


Update II: March 23, 2005 7:36am

Jesse Eisinger [4] looks at the dangers of relying on forward P/Es in today’s WSJ, and was kind enough to include a snarky comment from your humble blogger . . .

Smart Firm’s Auto Bet Drives South [5]
Jesse Eisinger
WSJ, March 23, 2005; Page C1
http://online.wsj.com/article/1,,SB111153033634386806,00.html

Update III: March 24, 2005 6:56am

Talk about great timing, the AP release this noce tidbit:

Despite scandals, earnings still fudged
[6]Rachel Beck
The Associated Press, Wednesday, March 23, 2005, 12:00 A.M. Pacific
http://seattletimes.nwsource.com/html/businesstechnology/2002216419_earningsquality23.html 


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/03/forward-earnings-are-opinions/

URLs in this post:

[1] Street Insight: http://www.thestreet.com/i/_htmlsi/dps/te/20050322/theedge1.html

[2] Doc Yardeni: http://www.yardeni.com/pub/fecb.pdf

[3] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/spx_over_optimism_yardeni305.jpg

[4] Jesse Eisinger: http://online.wsj.com/article/1,,SB111153033634386806,00.html

[5] Smart Firm’s Auto Bet Drives South: http://online.wsj.com/article/1,,SB111153033634386806,00.html

[6] Despite scandals, earnings still fudged
: http://seattletimes.nwsource.com/html/businesstechnology/2002216419_earningsquality23.html

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