As a global investment manager, we help institutions, intermediaries and individuals meet their goals, fulfil their ambitions, and prepare for the future.
The problem with earnings forecasts
We recently published our forecast returns for a range of asset classes over a seven-year horizon, which can be found here.
We made some major changes this year to the equity forecasting methodology, which is explained in the main document.
As part of the revision process, we took a look at analysts’ earnings-per-share (EPS) forecasts, in an attempt to include a wider range of information into at least the immediate forecast for equities.
However, we did not blindly take the latest consensus estimate. As economists, we are all too aware of the tendency for systematic biases to creep into forecasts: witness US GDP in recent years.
With this in mind, we looked at the historic over- or underestimate, by comparing 12 month ahead EPS forecasts with the actual realised EPS. The average bias is shown below for a range of markets.
Source: Bloomberg, Schroders Economics Group. July 2016. Used max history available, usually 10-15 years.
The bias for some markets is quite low; in the case of the US and Asia Pacific ex Japan, for example, there is almost no systematic bias.
Note that this is not the same as saying analysts get these markets right; only that their errors average out to roughly zero, so there is no bias to adjust for.
By contrast, analysts seem to be consistently optimistic on the earnings outlook for emerging markets, the UK and Europe ex UK. Something to bear in mind when receiving the next batch of equity analysts’ reports.
This site is for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy any security which may be referenced herein. This site is solely intended for use by institutional investors and institutional-investment industry consultants.
Schroder Investment Management North America Inc. (“SIMNA”) is an SEC registered investment adviser, CRD Number 105820, providing asset management products and services to clients in the US and registered as a Portfolio Manager with the securities regulatory authorities in Canada. Schroder Fund Advisors LLC (“SFA”) is a wholly-owned subsidiary of SIMNA Inc. and is registered as a limited purpose broker-dealer with FINRA and as an Exempt Market Dealer with the securities regulatory authorities in Canada. SFA markets certain investment vehicles for which other Schroders entities are investment advisers.
Schroders Capital is the private markets investment division of Schroders plc. Schroders Capital Management (US) Inc. (‘Schroders Capital US’) is registered as an investment adviser with the US Securities and Exchange Commission (SEC).It provides asset management products and services to clients in the United States and Canada.For more information, visit www.schroderscapital.com
SIMNA, SFA and Schroders Capital are wholly owned subsidiaries of Schroders plc.