The Wall Street Journal was out yesterday with a comment expressing optimism on 2020 earnings forecasts that is wrong:
While analysts have been downgrading their forecasts for this year’s revenues and earnings growth, projections for 2020 look more encouraging.
The real way these things work is that analysts have forecasts, say for 10% growth for the next two years:
…then, after speaking with management (because for the next year at least that is pretty much where analyst forecasts come from), the analyst decides that the growth is too aggressive and so reduces their forecasts by $5 in 2019 and $3 in 2020.
This sounds reasonable at first. However, the changes mean that in the face of weaker conditions the analyst has actually increased the growth rate forecast for 2020:
Given the focus for most analysts is the next year’s forecast, it takes a while for them to notice that the 2020 numbers are looking too optimistic, at which point 2020 will also be downgraded.
This happens all the time – you can even see it in the chart WSJ uses:
You can see it in the actual numbers:
So, no. I don’t take the increase in the 2020 growth rate as a good sign.
Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.
The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.
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