Tuesday, 8 April 2008

Analysts slow to cut earnings and economic forecasts

Analysts have been too slow in cutting earnings forecasts for US companies, according to this Bloomberg story.

When Wall Street's almost 1,800 equity analysts figured U.S. earnings growth for the third quarter of 2007, they were 8.2 percentage points too high. Forecasts for the fourth quarter were wrong, too, overestimating profits by 33.5 percentage points, the biggest miss ever.

It's no wonder investors don't trust analysts, says Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., which oversees $1.4 trillion for clients. Merrill Lynch & Co., Bank of America Corp. and the rest of the securities industry aren't losing credibility because of anything sinister. The problem is they didn't get their math right after credit markets froze nine months ago.

As Alcoa Inc. kicks off first-quarter earnings season today, analysts say 2008 will be the best year ever for U.S. profits, data compiled by Bloomberg show. Earnings for companies in the Standard & Poor's 500 Index will rise 10.7 percent, even after Federal Reserve Chairman Ben S. Bernanke acknowledged that the economy may fall into a recession and banks reported $232 billion of writedowns and losses, the forecasts show.

The analysts are "going to lead you off the cliff," said Richard Weiss, 47, who oversees $60 billion as chief investment officer at City National Bank in Beverly Hills, California. First-quarter earnings will be "a big wake-up call for some analysts who are sitting on big double-digit numbers," he said.

John Mauldin has also reproduced an article from James Montier that says that analysts are "asleep at the wheel", with their earnings forecasts lagging reality, but that this is not unusual.

Meanwhile, Menzie Chinn shows us that growth forecasts for the US and several other economies have also been drifting down gradually over the past few months. He notes:

One source of comfort -- no negative growth forecasted! (Of course, the low values for each forecast of y/y growth are now consistent with two quarters of negative growth.)

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