Saturday, May 22, 2010

Wall St.'s woeful forecasting not getting better

Nearly a decade ago – about the time the bursting tech bubble had raised serious questions about conflicts of interest in Wall Street equity research – consulting firm McKinsey & Co. did a study on the accuracy of analysts' company earnings forecasts. The results were discouraging: Analysts were routinely over-optimistic about earnings growth, too slow to revise forecasts when economic conditions changed, and prone to increasingly inaccurate forecasts when the economy slowed.

Since then, major scandals involving tainted research have come to light, Wall Street's biggest firms have paid $1.4-billion (U.S.) in penalties for those practices, and regulators have put rules in place aimed at creating equity research with more independence and distance from the investment-banking side of the business. Unfortunately, McKinsey reports, the changes have had little effect on the accuracy of analysts' projections.
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Looking at five-year rolling average growth estimates, there have only been two periods in the past 25 years when the earnings met or exceeded analysts' forecasts. Both were in recovery periods after the U.S. recessions of the early 1990s and the early 2000s.

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