Charles Schwab is raises an interesting issue regarding analysts:
"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 [Monday], 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 S&P 500 dropped almost 10 percent in the first quarter, the worst start to a year since 2001, as increasing unemployment, record mortgage delinquencies and a retreat in consumer confidence signaled that the economy is falling into a recession. Even with the decline, analysts’ recommendations to "buy” or "hold” U.S. shares climbed to 94.5 percent, the highest rate in more than five years."
There’s an old Wall Street expression about analysts: You don’t need them in a bull market, and you don’t want them in a Bear market. The latter half of that expression is usually because of the earnings downgrades adding to stock price action weakness.
Question: What will happen to equity prices if and when analyst downgrades start coming ?
What say ye?
Schwab Asks Who Needs Analysts After Biggest Flub
Michael Tsang and Eric Martin
Bloomberg, April 7 2008