How Companies 'Beat Estimates' in Earnings Season
No matter what happens, financially or economically, there is always a high number of companies regularly beating Wall Street estimates. Are Wall Street analysts that poor at predicting future corporate earnings, or is there something else potentially going on? Furthermore, what does that mean for investors using those estimates in making investment decisions?
As noted in this article, analysts are always wrong, and by a large degree.
“This is why we call it ‘Millennial Earnings Season.’ Wall Street continuously lowers estimates as the reporting period approaches so ‘everyone gets a trophy.’”
The chart shows the estimated changes for the second quarter of 2023 from February 2022.
An easy way to see this is the number of companies beating estimates each quarter, regardless of economic and financial conditions. Since 2000, roughly 70% of companies regularly beat estimates by 5%. Again, that number would be lower if analysts were held to their original estimates.
As shown, for companies to win the “beat the estimate game,” they need the bar lowered far enough to ensure they can clear it. If not for these downward revisions in analysts’ estimates, the majority of companies would miss, rather than beat, estimates. Such would obviously weigh on stock price performance which directly impacts executive compensation due to the now standard practice of using stock options.
Read that last sentence again.
There is an inherent conflict between Wall Street, corporate executives, and individual investors. As stated, there are billions at stake for executives and Wall Street, and the “beat the Wall Street estimate” game is critical in keeping corporate stock prices elevated. Unfortunately, this leads to a wide variety of gimmicks to
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