The Uselessness of forward earnings and forward PE forecasts

The Uselessness of forward earnings and forward PE forecasts

The Financial Industry is sending us all of the wrong signals.

I have a beef with the financial services industry and the watchdogs.  There are three frauds being committed by the financial industry that are blatantly misleading.  Even knowing that they exist – it is a challenge to get real data.

1.  Reported earnings vs. actual accounting earnings – instead of reporting earnings based on generally accepted accounting principles, companies report earnings that don’t include some costs of doing business – thus inflating earnings.  This is blatant manipulation – in the real world we would call this lying.  It is so bad now that the difference in the earnings of the 500 companies that make up the S&P 500 index is fake earnings of $118 and actual accounting earnings of $89.  And, you will never know this by listening to Bloomberg or CNBC. 

2.  The “analysts expectations game” – each quarter analysts from major banks/brokerages guess at what individual company reported earnings will be.  Never mind that the companies give hints ahead of time; never mind that they are talking reported (manipulated/fake earnings).  Then what is reported is whether the company beat the guesses (“expectations”) or not.  Analysts get bragging rights for being closest.  This is pure crap; useless to investors, and actually can be misleading.  We hear huge positive comments when some companies beat the estimates even though the actual earnings are down from prior quarters, meaning that the company isn’t doing well even though the reporters are bragging it up.  Misleading investors.

3.  Forward Earnings and Forward PE forecasts are massively wrong.  It is the analyst game again – they project the earnings of companies and sum them up for the collective earnings for the current year and future years.  Then these get used to calculate expected forward price/earnings multiples (PE) as a gauge of whether the company and the market will be richly priced or a bargain.   It would be one thing if the forecasts ranged a bit above in some years and a bit below, averaging somewhat in the zone of the future.  But this is not the case.  The forecasts for earnings are ALWAYS too high, and not by a tiny bit; by multiples too high.  How can you say in January of this year that the end of year 2016 (this year) earnings for the sum of the S&P companies will be 120 per share when the actual reported earnings have been in the 89-90 range for over a year, and then only reduce it by July (with ½ of year already reported) to 110.  These are mathematical impossibilities.  No one looking at current economic conditions could possibly come up with the forecasts they project.  Clearly this is, again, blatant misleading – again, in the real world this is lying.  In the real world people would go to jail for this. 


August 2016

At Calyx, we help families protect and manage their financial resources. We are a financial advisor and investment manager that partners with our clients to administer their financial affairs with personal attention and active risk management.

Calyx is also an advisor to several not-for-profit charitable trusts and endowments, working with committees of faith based organizations to preserve their legacy while providing operating income. We are sensitive to the investment needs of these clients while working within the guidelines they have established to reflect their principles.

Our Second Opinion Service is a free review of a family’s financial situation and portfolio. Our clients have told us that the information has been surprising and useful. This service is available for our clients, their friends, family or others around them who are unsure about their money.