Surprise! Analysts remain too Bullish:

“Exceptions to the long pattern of excessively optimistic forecasts are rare, as a progression of consensus earnings estimates for the S&P 500 shows (Exhibit 1). Only in years such as 2003 to 2006, when strong economic growth generated actual earnings that caught up with earlier predictions, do forecasts actually hit the mark.

This pattern confirms our earlier findings that analysts typically lag behind events in revising their forecasts to reflect new economic conditions. When economic growth accelerates, the size of the forecast error declines; when economic growth slows, it increases. So as economic growth cycles up and down, the actual earnings S&P 500 companies report occasionally coincide with the analysts’ forecasts, as they did, for example, in 1988, from 1994 to 1997, and from 2003 to 2006.

Moreover, analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12 percent a year, compared with actual earnings growth of 6 percent. Over this time frame, actual earnings growth surpassed forecasts in only two instances, both during the earnings recovery following a recession. On average, analysts’ forecasts have been almost 100 percent too high.”  (emphasis added)

The good news is the markets don’t take analysts nearly as seriously as they used to . . .

Note: I rarely quote McKinsey, as I have a pet theory they are at the root of all economic evil in the world. So far, my evidence is only anecdotal. If anyone wants a summer internship quantifying the negative impact of McKinsey on the world via actual data, please contact me.


Equity analysts: Still too bullish
Marc Goedhart, Rishi Raj, and Abhishek Saxena
McKinsey Corporate Finance Practice, APRIL 2010


Category: Analysts, Investing, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “McKinsey: Equity Analysts Are Still Too Bullish”

  1. jpm says:

    I love that graph (and thanks for publishing the latest version.)

    Two years (out of 24) the first estimate is lower than the reality. Why anybody thinks those guys are worth their salary is beyond me.

    [Re your pet theory: Absolutely correct. Why would you hire a bunch of young people completely inexperienced in your biz to make a recommendation and not live with the consequences? And for some reason it's considered an acceptable excuse: But the consultants recommended it!]

  2. wcvarones says:

    Why didn’t the lazy McKinseyites include 2009 numbers in the graph?

  3. VennData says:

    Bullish salesmen? Who’s heard of such a thing?

    The free market’s working fine.

  4. rws says:

    Your suspicions about the consulting industry are largely correct. I was a partner at three firms during 1980-2000, and during that time (especially during the 1990s) I watched the industry evolve into a malevolent influence. While highly influential, McKinsey is by no means the worst of the lot.

  5. Freestate says:

    Amen on McKinsey. That would be an easy intern job. All you have to do is contact the thousands of people such as myself who have hard facts and data from personal experience about McKinsey’s work in Fortune 500 companies. The data would be unassailable. The bottom line of the study would be simple: McKinsey exists to make large profits from justifying the ridiculous ideas of narcissistic senior executives. We used to call it profitable pandering through analytical manipulation.

  6. Doctor A says:

    So why do we hear every three months about how 80% of the SP500 “beat estimates”? Looks like most companies are missing estimates that are too high.

  7. doug says:

    McKinsey came to the pharmaceutical company I worked for in the 70′s and 80′s and I was astounded at their lack of anything except bullshit, of which there was plenty. Many of their recommendations were followed. The company no longer exists.
    Later I read about McKinsey’s involvement in Enron……wasn’t all that surprised.

  8. dead hobo says:

    BR mused:

    The good news is the markets don’t take analysts nearly as seriously as they used to . . .

    Yes, but they still play an important role. They are the unseen experts who are paid to know important things. They are bullish but, somehow, the media notes that actual results frequently beat analyst expectations. They are to greed what the smell of good food is to salivation.

    Experts in the shadows, who always get it too low, say that great numbers are ahead. Buy now or be left behind. It’s just free money laying on the pavement. Analysts add credibility to headlines and give sales pundits the ammunition to rope in fresh cash or keep old cash still in the game.

  9. Bootvis says:

    Re: the summer internship

    How serious are you about offering summer internships?

  10. KidDynamite says:

    interesting chart. i love how they attribute the 2003-2006 numbers to “when strong economic growth generated actual earnings”

    on the contrary – isn’t the real problem that in 2005 and 2006 the bubble was so out of control with “pseudo” earnings that even the overly bullish analysts couldn’t keep up???

  11. Mannwich says:

    McKinsey’s job is to complicate the uncomplicated in every facet of our economy. Mission accomplished. Well done, sociopaths.

  12. dead hobo says:

    There appear to be two sets of analysts.

    One set of analysts always gets it too low, as in having their estimates beat yet once again. These are the micro analysts or the specialists. The other set takes the macro view and proclaims bloated projected futuristic EPS and P/E levels for the market as a whole.

    It seems the average person confuses the specialties and just sees free money on the pavement, thanks to analysts who only the ‘smart money’ can properly decipher.

  13. Mannwich says:

    …..and then fill their kindred spirits’ (CEO’s and other empty suit execs) pockets of shareholder and employee money while the gettin’ is good.

  14. Greg0658 says:

    when the video posts .. the oracle was most excellent in Beckys drill-down:
    “Warren Buffett Will Be Live on CNBC Before Tomorrow’s Testimony”

  15. Bruman says:

    I don’t understand the chart. Can you put it in a 2×2 table for me? ;-)

  16. Alex says:

    “If anyone wants a summer internship quantifying the negative impact of McKinsey on the world via actual data, please contact me.”

    lol… please tell me you have a team of interns each summer, unlocking all the secrets of the world.

    Maybe one to correlate the career path of Timmy G with action at (and eventual condition of) each organization he has been in charge of? I have a feeling we would see a pretty interesting pattern there.

    But if you want to add an intern to look for lost Nazi gold, I would like that too.

    Seriously, my favorite story is how McKinsey advised a bank to get into middle-market lending around 1990. So First Interstate did so, lost their butts, and ended up mostly liquidating most of the portfolio. Lovely!

  17. HEHEHE says:

    This is classic Mckinsey. Restating the obvious. My bro works for a fortune 500 co. Mckinsey is hired to do a review. Consultant goes around and talks to my brother and other managers. After review the managers and president sit down with consultant in conference room. Consultant just regurgitates various managers suggestions for improvement. President asks Consultant is she has any “original ideas”. Basically the end of the meeting.

  18. dsawy says:

    Whatever the sentiment, that is a great chart.

  19. The Curmudgeon says:

    When I think of the consultants role in business, I can’t get out of my head the two consultants in “Office Space” that promoted the guy that had basically gone rogue, and was cleaning fish at his desk, among other outrages.

  20. DMR says:

    The Classic McKinsey Cycle
    1) McKinsey hires college frat boys and teach them the “problem solving method”
    2) College frat boys write a report titled “Acme corp can increase profits by 100% if they do X,Y,Z”
    3) Acme Corp’s CEO implements strategy.
    4) Analysts take note and increase their forecasts by 100%
    5) College frat boys write a report titled “Equity Analysts: Still too bullish”

    The Ritholtz Variation
    6) BR hires intern to study McKinsey frat boys.
    7) What happens next?

  21. wally says:

    “If anyone wants a summer internship quantifying the negative impact of McKinsey on the world via actual data, please contact me.”

    Does it pay?

  22. johnjohn12345 says:

    Disclaimer: I’m a consultant

    These consultancies make billions because they get hired and rehired time after time by Furtune 500 companies. These are the most successful companies in the world and you have to assume their top executives are capable people.

    Are you saying that all the top companies are filled with incompetent managers that hire consultants for no good reason time after time even after these consultants delivered no value in all the last projects ?

    Or are you saying McKinsey et al have some sort of a hypno magic trick on these guys?

    Maybe they get rehired because they actually deliver value? Maybe the failures that get public are just anecdotes? Consultants have been around in their current form for the last 20-40 years… how come you can only point out to a dozen or so of hearsay “failures”?

  23. cognos says:

    Dear “consultant”,

    It is a FACT that McKinsey consultants were at work at Bear Stearns and AIG. I dont know, but think it is highly likely that they were at work at Fannie and Freddie.

    Where’s the value?

    I have worked at a couple of the most successful organizations. It was widely acknowledged that our lame competitors used consultants and that it was almost always a weak move.

    The govt uses LOTS of consultants.

  24. cognos says:

    This study is as LAME as the typical consulting output. Its just wrong / some simple bias in how inexperienced people framed or referenced the data. That is why every year looks too similar. Its a study bias… not economic.

    It is simply incorrect to say that in 1996 EPS estimates for 1998 were higher than they actually came in. It is hard to judge this because a) they did not include 2009, the easiest comp and b) the number for “EPS” makes no sense. I see S&P500 earnings as $40-90/shr.

    What do $0.4 and $0.7 mean? Please tell me they are not doing a simple average of “eps” across shares/companies. That is moronic.

    But either way, it is clear from looking at this chart that it is simply the result of poor workmanship and not really thinking about the study, data consistency, proper methodology, etc.

  25. cognos says:

    Final reference point… at Q1 2009… average analyst estimate for S&P500 2009 EPS were $40-50. Actual EPS was what… $65? Maybe $68?

    So that was 50% higher delivered that 1-yr prior. How would that line look on the chart?

    Why does the 1 line we know best look totally different from almost all 30 lines shown? Why dont any other first year recovery lines look even remotely similar?

    Answer – because the study and the data is bad.

  26. [...] It’s no surprise analysts have been persistently overly optimistic about companies’ earnings estimates. Barry Ritholtz links to a McKinsey piece showing just how blue-sky they’ve been. [...]

  27. Ramstone says:

    Meh. Just as there are great strategists who work for Evil Incarnate, McKinsey has some damn good research.

  28. [...] at this chart next time you’re tempted to believe analysts’ estimates. They’re too [...]