Do Analyst Estimate Revisions (Still) Help Forecast Relative Stock Returns?

15 January 2023 Some of the common questions among fund managers who are looking at Mill Street’s stock selection and asset allocation tools are on the topic of whether using analyst estimate revisions metrics for stock return forecasting is useful: “Do analyst estimates really matter for stocks nowadays? “ “Aren’t equity analysts always conflicted, and […]

Analysts have become quite bearish on US earnings forecasts

A question we have heard several times from clients has been: when will equity analysts get as bearish as investors have been recently? Well, analysts may be getting closer to that point now, particularly for the large-cap US stocks that dominate the cap-weighted indices.

Q3 earnings should be good, but uncertainty remains high

As Q3 ends and with reporting season set to begin in the coming weeks, we can update the current consensus earnings outlooks for Q3 and Q4 as well as calendar year 2021 and 2022 for the S&P 500. Earnings should be up a lot from last year, but uncertainty among analysts remains quite high.

For Q3, S&P 500 earnings are expected to be up 28% from a year ago according to Factset, another big percentage gain. That figure is higher than it was at the start of the quarter (it was 24% on June 30th) but has been stable since July and down marginally since the end of August. So the pace of gains in aggregate index earnings has eased, but estimates are still rising modestly on balance.

Analyst uncertainty still high even as earnings estimates surge

As we have discussed for some time now, equity analysts are raising their forecasts for corporate earnings more broadly and by larger amounts than at any previous time in our 20-year data history. However, while analysts are confident earnings are rising, they still show significant uncertainty about the future level of earnings, as reflected in the dispersion or disagreement in estimates for US companies.

Analysts still can’t keep up with surging earnings

Earnings reports for Q1 are coming in very hot once again, even after several consecutive quarters of beating consensus expectations. Analysts seem to still be struggling to keep up with the strength in US earnings, and continue to raise their earnings estimates.

To be fair, analysts have never had to deal with the level of volatility and uncertainty in the macroeconomy that has been seen in the last year or so. The shock of COVID-19 and associated shutdowns in economic activity, followed by unprecedented levels of fiscal and monetary stimulus, and the record-breaking speed of vaccine development are all extraordinary events that most analysts following individual companies are not traditionally prepared to incorporate into their earnings forecasts. The limitations on travel and uncertainty among company executives themselves are also likely hampering analysts in producing their earnings forecasts.

US earnings estimate revisions trends remain strong amid Q4 earnings season

While certain heavily shorted stocks are getting much of the attention lately due to retail-driven price surges, the bigger picture news is Q4 earnings reports and analyst behavior.

We track earnings estimates for a broad universe of about 2300 US stocks (market cap of $200 million and up) and construct estimate revisions indicators using two key metrics: breadth and magnitude. Breadth is the net proportion of analysts raising versus lowering estimates for a stock, which is -100% if all analysts are cutting their earnings estimates and +100% if all are raising estimates (0 indicates a balance between positive and negative revisions, or no activity at all). We look at this proportion based on revisions that occurred over the last 100 calendar days (about one quarterly reporting cycle).

Earnings uncertainty still extremely high going into Q2 reporting season

As Q2 earnings season gets underway, the level of uncertainty about future earnings among analysts remains extremely high. Despite somewhat calmer equity market activity recently, our data shows that the level of disagreement among analysts regarding earnings over the next 12 months (NTM) is still well above the highest levels reached in the Great Financial Crisis (2008-09) period (chart below).