Earnings Season & The Truth About Wall Street Analysis

Earnings results for the third quarter is fast approaching, and investors are getting excited for the “beat the estimate” game where Wall Street continually lowers estimates so companies can beat them. As I noted previously:

One of the reasons given for the push to new highs was the ‘better than expected’ earnings reports coming in. As noted by FactSet:

“78% have reported actual EPS above the mean EPS estimate…The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year (76%) average and above the 5-year (72%) average.”

The problem is the “beat rate” was simply due to the consistent ‘lowering of the bar’ as shown in the chart below:

Beginning in mid-October last year, estimates for both 2019 and 2020 crashed.

This is why I call it ‘Millennial Soccer.’

Earnings season is now a ‘game’ where scores aren’t kept, the media cheers, and everyone gets a ‘participation trophy’ just for showing up.

You also can’t turn on financial television, or read a financial website, without the continual droning from a Wall Street analyst about why the markets are destined to go higher, or why you should be buying XYZ stock.

The mainstream press, most financial advisers, and the average investor, unfortunately, take this information as “fact,” and use it as a basis for portfolio investment decisions.

But why wouldn’t you?