Earnings expectations in the COVID crisis

That is a new paper by Augustin Landier and David Thesmar, here is the abstract:

We analyze firm-level analyst forecasts during the COVID crisis. First, we describe expectations dynamics about future corporate earnings. Downward revisions have been sharp, especially for 2020 and 2021, but much less drastic than the lower bound estimated by Koijen et al. (2020). Analysts’ consensus forecast does not exhibit evidence of over-reaction: Forecasts over 2020 earnings have slowly decreased by 10.2% over the course of March and April 2020 before stabilizing. Long-run forecasts, as well as expected “Long-Term Growth” have reacted less than short-run forecasts, and feature less disagreement. However, even the 2024 forecasts are revised down. Second, we ask how much forecast revisions explain market dynamics. Without change in discount rates, mean forecast-implied cumulative returns from mid-February to mid-April should be around -9%, while they were actually -20%. The difference between forecast-implied returns and actual returns implies a rise in the average discount rate of about 1\%. This increase is decomposed into three factors: increased risk premium (+1\%)), increased leverage (+1\%) and interest rate reduction (-1\%). In other words, analyst forecast revisions explain most of the downward revision in equity values.

This is perhaps the best stock market analysis I have seen so far…?

Comments

"In other words, analyst forecast revisions [of earnings] explain most of the downward revision in equity values." Size (of earnings) matters. Does this mean market values of equities will return to fundamentals? Is this a good thing or a bad thing? Without reading the paper I assume the author is referring to publicly traded equities. What about non-publicly traded equities, like all those tech stock pocket rockets (I couldn't resist). What are the tech investors going to do if tech stocks are valued based on fundamentals? Is this the end of tech as we have known it?

Solvency risk is real for many companies.

Re: " In other words, analyst forecast revisions explain most of the downward revision in equity values."

In other words,
Weatherforcaster's revisions
Explain
Most of Today's weather.

And, the rooster crowed
This morning and
The sun rose.

This is the best analysis I have seen so far
With respect to weather and
Sunrise.

Equity values are forward looking. DCF etc. So the analogy doesn’t work.

That comment doesn't make sense. Equity prices are equity values, and prices are measured by completed exchanges. We are not talking futures markets.

(1) You are assuming a completely efficient market. It isn't. (2) The stock market is a type of futures market. You are paying now for delivery of cash flows later.

Your comment doesn't change anything.

I'm a 25yr global equities investment professional managing about $30b directly. Through early to mid April I'm pretty confident in saying that analysts have been slow to downgrade. A lot of them are caught like deer in the headlights, waiting for "guidance" from management that hasn't been forthcoming. And lots of analyst estimates in consensus haven't really been updated at all. More action is coming post 1Q2020 results.

I am also an investment professional.

I agree with this observation--estimates are low quality right now and certainly not reflective of buyside expectations.

There are other issues with the analysis. Such as: earnings is a levered metric and for many industries investors are looking at unlevered valuation as well as investors putting a multiple on through-cycle earnings or looking to 2021 or beyond earnings. Dispersion in estimates by sector (eg big tech vs consumer discretionary) and the respective leverage profiles of those sectors also matters. Also...don't fight the Fed. These issues hold all while putting aside arguments over whether a multiple really is the inverse of a DCF (this is an assumption).

All of this is to say that this paper doesn't seem to be a good analysis and surely research published by major investment banks is better on this topic. The issue may be a selection bias in what Tyler reads and a disconnect between how the academic community and professional investing community think about equity markets.

Agreed, this paper is just some academics trying to show off their technique. Pick a different week to end the study and possibly get a different result. Any mention of analyst long term growth rate forecasts immediately tips me off that the academic hasn't actually worked in the field. Most sell-side analysts don't even provide such a long term growth forecast, and nobody with experience takes them seriously.
I'm pretty confident that 2020 EPS is going to fall much more than 10%! In early April consensus estimates were barely predicting decline. I know because in presentations to clients and colleagues I was explaining how far behind reality consensus estimates were. Same for most economic forecasts, but everyone expects those to be badly wrong.

so high paid economic forecasters routinely get to "revise" their incorrect forecasts with no loss of credibility or paychecks.

nice "confidence game" against the business 'marks'

He is talking about sell-side equity analysts, not economist that have their own but different set of problems.

It is the other way round. Forecasts were lowered to reflect the downward in equity valuation and changes in rates and leverage.

In my model the S&P 500 P/E on trailing operating earnings fell from over 20 -- but still fairly valued at current interest rates -- to around 15 (quite cheap) at the bottom a month or so ago. This morning it was back to about 17.

My approach does not use any forecast variables. But I agree that
analysts have been extremely slow to revise estimates. And yes, that is largely due to the absence of forward guidance from firm mamagement.

@daguix:

... so elite economic forecasters are unable to consider possible changes in "equity valuation and changes in rates and leverage" ?

What is the purpose of such economic forecasts to begin with ?

The purpose of equity forecasts is for fund managers to justify their investment choices ex post and to cut on analyst expenses.
The banks also reward their clients with better forecast valuations, especially when these clients need to raise money and generate lots of fees.

The Fed has made clear the Fed will do "whatever it takes" to support asset prices. Duh. Nobody wants to admit it, but that's become the role of the Fed. Can the Fed do it this time? I don't know. Supply and demand are simultaneously collapsing. I will repeat: supply and demand are simultaneously collapsing. Our Austrian friends are waiting with great anticipation. Duh.

This comment will be heavily undervalued because it sounds crackpot, but I think it's closer to the truth than the insanity happening in investment and governance right now.

This is barely even economics anymore. It's not a free market, since the big institutions are not free to fail. It's not supply and demand, because clearly what's going on has only nominal relation to supply or demand. So what the heck do these people think they're doing?

People keep saying "futures"... What future? The one where for instance kids aren't going back to school for the rest of 2020, so productivity will be lessened for all those parents all year, and so far as I can tell nobody's really thinking effects like this through? I feel like I've forgotten to take my crazy pills here.

So far as I can tell, the only operating principle is a bunch of stereotypical Boomers just saying "the economy always goes up" and so long as they don't look down Wile E. Coyote won't fall. I feel like until and unless someone like China is prepared to call the bluff - cut exports and post an ultimatum on its debts - the sane position is to begin looking at shorting the next collapse now. Every rube paying into a 401k is enlarging the pot. It will absolutely pay out, sooner rather than later, and possibly ad infinitum.

Game theoretically? I'm trying to think of a world where nothing is really produced or consumed, but yet investors daily make trillions of transactions to push around trillions of dollars loosely based on the random motion of the corpse of what used to be the United States. If you can figure out how that works, my money is, we will all soon know your name and future economists will learn your ideas in school. The problem is, I think we already know that man's name, and he's not shy about it.

We got black swanned, that means the set of companies in the fixed channel stock market did into change, makes life simple.

The firm analyst is computing the amount of liquidity obtained with one share of stock. But the total market average price is know, on a price weighted basis. So the analysis get the men cost of a share in units of liquidity. That is interest rate (or its inverse, and ditto this going down)

Then the analysis needs to know how much the firm variance differs from market variance, and that give him risk premium.
The the analysis needs to know how far he is skewed, is the firm way off at one end of the tail? That gives him leverage.

This is the same model as out three color pandemic models, and dig deeper into those papers you will see the same thing, moment matching between infected, immune and triadic response. Just doing the 3D abstract tree, coloring a beach ball with three different colored buttons making it a white as possible.

Elon Musk acknowledged today that Tesla's stock price is bullshit. Is the man nuts? Maybe. I suspect not. He knows Tesla's stock price, like tech stock prices generally, is nuts, but better to have a controlled drop in prices than a collapse. We are not in Oz anymore, are we?

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