Annual Dashing of Sugar Plum Visions

Wall Street analysts are a fascinating bunch and a bit of a mystery. Why? Because the vast majority of the time they’re an exuberantly optimistic lot. Visions of 15% earnings growth dance perpetually in their heads and the 15% long-term forecasts roll reliably year in and year out. If the current year is “n”, then n+1 and n+2 are virtually always robust.

But the fourth quarter arrives, year-in and year-out … and they turn grinchy. Some years they’re more grinchy than others and the current edition fits that bill. Where once visions of 12-14% year-over-year change in aggregate EPS forecasts danced in their heads, this has been replaced by a somber 6-8% (and they’re not done yet — they still have 10-14 days to reduce their 2012 forecasts.) 🙂

Barry Ritholtz reports regularly on this and recently reminded that dancing on and dashing sugar plums into mincemeat is common fare at this time of year. See: Analysts Get Gloomy Right On Schedule

As we’ve been pointing out for several months, there’s been considerable optimism baked into the overall forecasts — and one of the reasons that the current “recovery” still feels a tad recessionary can be seen in the accompanying figure.

Note the sugar plum optimism for 2013 forecasts. Also note that although only “8% of precincts are reporting” with 2014 forecasts so far … as they roll in, they appear headed for the time-honored land of 15% year-over-year growth — no matter what history suggests.

History suggests that they’re always 50% high (15% forecast versus 8-10% actual) and that studious investors are well-advised to completely ignore analyst consensus estimates when it comes to % EPS Growth.

We do. And the sugar plums are grateful.

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