How Optimistic Earnings Forecasts Are Kept in Check

Consensus earnings estimates, prominently quoted at major media outlets such as CNBC, Bloomberg, and the Wall Street Journal, play an important role in capital markets by providing investors with a proxy for earnings expectations.  The common belief is that they are formed by simply taking an average of all analyst forecasts. However, to what extent is this true?  Unsophisticated investors know little about the process, while sophisticated investors typically know only what consensus vendors such as Institutional Brokers’ Estimate System (I/B/E/S), whose estimates CNBC uses to identify earnings misses, state in their marketing materials. Specifically, I/B/E/S claims it “removes’ stale … Read more