Why Earnings Estimates are a Waste of Time

Investors and analysts have a nasty habit of making poor earnings growth guesses at the very beginning of any given year. And if you base your trades on these guesses, you’re going to end up disappointed…

From where I’m sitting, the earnings prediction cycle is becoming, well, pretty darn predictable.

Here’s how it goes:

Analysts trot out their most optimistic guesses in January-February as fourth quarter numbers start to stream in. The predictions are mostly upbeat — and they get even stronger for the third and fourth quarters.

Just take a look at expected earnings for 2014…

“As the last of the fourth quarter earnings trickle in, the S&P 500′s earnings growth rate for the quarter looks strong, at 8.5 percent. What’s weird is what analysts are predicting for earnings growth in 2014,” explains CNBC. “In an outlook that could only be described as disjointed, analysts are expecting earnings growth to dive to 0.9 percent in the first quarter, only to grow to 11.9 percent in the third quarter.”

If you ask me, there’s nothing “weird” about it. Bad weather has been the big excuse for a Q1 earnings dip, so that part makes sense. Then, like clockwork, everyone is expecting earnings to snap back to life during the second half of the year.

This follows the same pattern as 2013…

Of course, the guesses usually don’t stand the test of time. Analysts are forced to swoop in with their revisions when the rosy predictions from the beginning of the year don’t pan out. So it goes — year in, year out.

The important point to remember here is that despite the downright failure of the earnings predictions from last year, the market still posted what can only be called a historically strong performance. You can dance with these earnings guesses all night. You can take them apart, turn them inside out and make models of your own. But the market will do what it does — your best guess just doesn’t really matter.

You’re much better off if you scrap the predictions and take what the market gives you one week at a time. Analysts will eventually revise these 2014 earnings estimates, too. It’s only a matter of time…

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