Do analysts systematically ignore the connection between future firm earnings and current economic conditions? In their July 2024 paper entitled "Predicting Analysts’ S&P 500 Earnings Forecast Errors and Stock Market Returns Using Macroeconomic Data and Nowcasts", Steven Sharpe and Antonio Gil de Rubio Cruz examine the quality of bottom-up forecasts of near-term S&P 500 earnings aggregated from analyst forecasts across individual firms. Specifically, they:
- Model expected aggregate S&P 500 quarterly earnings growth as a function of GDP growth, output and wage inflation and change in dollar exchange rate. They also consider a simplified model based only on real GDP growth and change in the dollar exchange rate.
- Calculate the gap between modeled S&P 500 earnings growth and analyst-forecasted growth.
- Estimate how well this forecast gap predicts analyst forecast errors.
- Test the extent to which the forecast gap predicts S&P 500 Index total returns.
Using quarterly actual and forecasted S&P 500 earnings, S&P 500 Index total return and values for the specified economic variables during 1993 through 2023, they find that:
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