A generation of overoptimistic equity analysts

McKinsey research shows that equity analysts have been overoptimistic for the past quarter century: on average, their earnings-growth estimates—ranging from 10 to 12 percent annually, compared with actual growth of 6 percent—were almost 100 percent too high. Only in years of strong growth, such as 2003 to 2006, when actual earnings caught up with earlier predictions, do these forecasts hit the mark.

The capital markets, by contrast, have been more realistic: except during the 1999–2001 market bubble, actual price-to-earnings ratios were 25 percent lower than those implied by the forecasts of analysts. To learn more about this research, read “Equity analysts: Still too bullish” (April 2010).

http://www.mckinseyquarterly.com/newsletters/chartfocus/2010_07.htm