Analysts Have A Great 2017

Analysts get a lot of flak when they get caught changing their price targets and recommendations after an earnings surprise. I sometimes criticize them to make sure investors know not to take their word as gospel. If you are a beginner, you might think the 12 month price targets are where the stock will go. Because it’s extremely tough to predict where stocks will go in 12 months, these aren’t going to be exactly accurate. However, 2017 was a great year for analysts. The chart below shows the performance of stocks with buy recommendations. The first quintile shows the stocks with the highest percentage of buy rankings by analysts. The second quintile is the 2nd 20% grouping of buy rankings, etc. As you can see, the analysts were almost perfect when you look at the median performance. The only slight error is quintile 4 has a 0.1% higher median return than quintile 3.

2017 was probably the best possible situation for analysts’ predictions to be accurate because there weren’t any exogenous events which caused stocks to correct. Either way, I still take the 3,000 price target JP Morgan has for the S&P 500 at the end of 2018 seriously. With recommendations looking great in 2017, let’s look at the forecasts for Q4. As you can see, the estimates haven’t moved much in the past 6 weeks. This is great news as the current average estimate is for 10.4% earnings growth and 6.6% revenue growth. The expectations on September 30th were 11.3% and 5.7% growth respectively. The estimate for 2017 earnings also hasn’t moved much because Q4 is the only quarter left in the year.

The 2018 earnings estimate is up in the past few months as you can see from the chart below. Even just looking at the first few months of data, this year is looking unusual as it’s the only year with estimates increasing. Even 2017, which had the best earnings results in years, can’t compete with 2018. The current 2018 estimate is $146.26. JP Morgan’s estimate went from $143 to $153 because of the tax cuts. I can see the average estimate increasing in the next few months because of the tax cut. The stock market will price in the analysts’ changes before they happen.