Analysts, companies, and their complicated relationship with earnings estimates ๐ค
Plus a charted review of the macro crosscurrents ๐

๐The stock market declined last week, with the S&P 500 shedding 1% to close at 6,040.53. Itโs now up 2.7% year to date and up 68.9% from its October 12, 2022 closing low of 3,577.03. For more on recent market moves, read: 3 stock market thoughts amid the DeepSeek sell-off ๐ค
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I was thrilled and honored to be included in Yahoo Financeโs 2025 Chartbook.
My contribution will look familiar to TKer subscribers: Analystsโ estimates for annual earnings per share (EPS) for the S&P 500 at the beginning of the year versus what was actually reported. The analysis, which came from FactSet, covered the past 25 years.
Excluding 2001, 2008, 2009, and 2020 โ which are arguably outlier years โ the average difference between the initial EPS estimate and the reported EPS was just 1.1%. Thatโs a remarkably small margin of error if you ask me.
Weโre in the midst of Q4 earnings season, which means itโll be a few weeks before we know exactly what S&P companies earned in 2024. But as I noted in the Nov. 24, 2024 TKer, analysts have been on track to nailing the number.
Thereโs a ton to be said about all this. So, here are some bullets:
๐ Initiate an estimate, then lower the estimate... After analysts introduce their earnings forecast at the beginning of the year, theyโll make revisions as new information comes to light. Historically, that has led to EPS estimates being lowered, especially ahead of quarterly earnings seasons. (More here.)
โฆand then revise up the lowered estimate. But with each passing quarter, most companies will often report EPS that beat those lowered estimates. (More here.) So basically, EPS estimates often make a round trip back to near where they started.
โ๏ธ Analysts and executives talk to each other a lot. Executives spend a lot of energy guiding investors and analysts on where they expect earnings to go. (More here.) This helps limit stock price volatility when earnings eventually get reported. However, all parties involved usually like to see a stockโs price go up. And so quarterly EPS estimates are usually at levels that companies will beat.
โฒ๏ธ Executives are great at turning the dials... Companies have options they can pursue if their numbers are tracking below target. In their efforts to increase revenue, they can incentivize employees with everything ranging from bonus cash to free pizza parties. In their efforts to get costs down, they can freeze hiring, cut expense budgets, and cancel holiday parties. If they have a savvy accounting department, they can โฆ get โcreative.โ If youโve ever worked at a big company, any or all of this will sound familiar. And these actions, while helpful for hitting short-term targets, can come at the cost of long-term goals. JPMorganโs Jamie Dimon and Berkshire Hathawayโs Warren Buffett are among prominent folks who have pulled back the curtain on these questionable practices.
๐ โฆalso, dialing back is a thing. If sales and earnings are tracking well above target, youโll sometimes hear about business being pushed back to the next quarter or the next fiscal year. Because why reset the bar so high for yourself? The same thing can be said about expenses โ if youโre under budget, you might find someone encouraging you to find ways to spend before they close the books on the year. Reporting a massive better-than-expected year and following that up with a lackluster one can trigger unfavorable moves in the stock that smooth and steady earnings growth wouldnโt.
๐ค Then why are Wall St price targets so off? A lot of ink has been spilled about how Wall Street forecasters are terrible at making one-year price targets. Youโd think theyโd be better at this if the EPS estimates are so accurate. But as I wrote last May, year-end price target calculations often go wrong because the forecaster is applying the wrong P/E multiple. (More here.) It is incredibly difficult to predict where P/Es are headed. (More here.)
About those other years โ ๏ธ
I mentioned that analystsโ earnings estimate accuracy is high when you exclude 2001, 2008, 2009, and 2020.
But weโre not here to praise analysts. Weโre here to understand how the markets work.
And the markets will give us outlier years from time to time.
Maybe 2025 turns out to be one of those difficult years. We have a president making sweeping decisions including putting aggressive tariffs on the countryโs biggest trading partners. While tariffs may help advance political interests, most agree they present a headwind to the economy.
Iโm of the mind that the president isnโt interested in seeing the stock market go down on his watch. But we canโt rule out the possibility that the administration makes a mistake that proves difficult to reverse.
Zooming out ๐ญ
We can debate the accuracy and usefulness of analysts earnings estimates (and price targets). It can be a fun opportunity to talk a lot of trash and kill time. But itโs not a very productive use of time.
That said, most analysts are pretty good at identifying the relevant historical data and piecing together the important fundamentals that help us understand what earnings and prices will do.
As for executives, thereโs much more to be addressed about why they manage earnings and analystsโ expectations for earnings. This has been the subject of past newsletters and will be the subject of future ones. For now, read what Dimon and Buffett have said here.
For stock market investors, what ultimately matters is where earnings are actually headed. Theyโre usually expected to go up and they usually end up tracking that expected path.
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Related from TKer:
'Better-than-expected' has lost its meaning ๐คท๐ปโโ๏ธ
JPMorgan's Jamie Dimon says the quiet part out loud about quarterly earnings ๐
Warren Buffett blasts โone of the shames of capitalismโ ๐คฌ
Where Wall Street's year-end price target calculations often go wrong ๐
Review of the macro crosscurrents ๐
There were several notable data points and macroeconomic developments since our last review:
๐๏ธ The Fed keeps rates unchanged. In its monetary policy announcement on Wednesday, the Federal Reserve left its target for the federal funds rate unchanged at a range of 4.25% to 5.5%. This follows three consecutive rate cuts.

From the Fedโs policy statement: โRecent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.โ

For more on the impact of monetary policy, read: 'How many times will the Fed cut rates?' is not the right question for stock market investors ๐ช
๐ Inflation trends are cool. The personal consumption expenditures (PCE) price index in December was up 2.6% from a year ago, up from Novemberโs 2.4% rate. The core PCE price index โ the Federal Reserveโs preferred measure of inflation โ was up 2.8% during the month, near its lowest level since March 2021.

On a month over month basis, the core PCE price index was up 0.2%. If you annualized the rolling three-month and six-month figures, the core PCE price index was up 2.2% and 2.3%, respectively.

Inflation rates continue to hover near the Federal Reserveโs target rate of 2%, which has given the central bank the flexibility to cut rates as it addresses other developing issues in the economy.
For more on inflation and the outlook for monetary policy, read: The Fed closes a chapter with a rate cut โ๏ธ and The other side of the Fed's inflation 'mistake' ๐ง
๐ต Key labor costs metric ticks up. The employment cost index in the Q4 2024 was up 0.9% from the prior quarter.

For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed's war on inflation ๐
๐ญ Business investment activity rises. Orders for nondefense capital goods excluding aircraft โ a.k.a. core capex or business investment โ rose 0.5% to a record $74.8 billion in December.

Core capex orders are a leading indicator, meaning they foretell economic activity down the road. While the growth rate has leveled off a bit, they continue to signal economic strength in the months to come.
For more on core capex, read: 9 once-hot economic charts that cooled ๐ and 'Check yourself' as the data zig zags โฏ
Wells Fargo economists caution that the December uptick could reflect a pull-forward of future orders: โThis may to an extent signal purchasing managers are hedging against potential tariff disruption by stockpiling goods that might eventually be impacted by those duties.โ
For more on this behaviors, read: The business community's 2-part plan for addressing tariffs ๐
๐๏ธ Consumers are spending. According to BEA data, personal consumption expenditures increased 0.7% month over month in December to a record annual rate of $20.4 trillion.

Adjusted for inflation, real personal consumption expenditures rose by 0.4%.

For more on resilient spending, read: The state of the American consumer in a single quote ๐ and Americans have money, and they plan to spend it during the holidays ๐
๐ณ Card spending data is holding up. From JPMorgan: โAs of 24 Jan 2025, our Chase Consumer Card spending data (unadjusted) was 1.9% above the same day last year. Based on the Chase Consumer Card data through 24 Jan 2025, our estimate of the US Census January control measure of retail sales m/m is 0.55%.โ
From BofA: โTotal card spending per HH was up 0.7% y/y in the week ending Jan 25, according to BAC aggregated credit & debit card data. The South saw a y/y decline in total card spending in the week ending Jan 25 likely due to the snowstorms. The unfavorable base effect from MLK Day timing change (1/15/24 v 1/20/25) also muted total card spending.โ
For more on the consumer, read: Americans have money, and they plan to spend it ๐
๐ Consumer vibes deteriorate. The Conference Boardโs Consumer Confidence Index ticked lower in January. From the firmโs Dana Peterson: โAll five components of the Index deteriorated but consumersโ assessments of the present situation experienced the largest decline. Notably, views of current labor market conditions fell for the first time since September, while assessments of business conditions weakened for the second month in a row. Meanwhile, consumers were also less optimistic about future business conditions and, to a lesser extent, income. The return of pessimism about future employment prospects seen in December was confirmed in January.โ

Relatively weak consumer sentiment readings appear to contradict resilient consumer spending data. For more on this contradiction, read: What consumers do > what consumers say ๐ and We're taking that vacation whether we like it or not ๐ซ
๐ Consumers feel worse about the labor market. From The Conference Boardโs January Consumer Confidence survey: Consumersโ assessments of the labor market outlook remained pessimistic. 19.4% of consumers expected more jobs to be available, down slightly from 19.8% in December. 20.3% anticipated fewer jobs, unchanged from December.โ
Many economists monitor the spread between these two percentages (a.k.a., the labor market differential), and itโs been reflecting a cooling labor market.
For more on the labor market, read: The labor market is cooling ๐ผ
๐ผ Unemployment claims fall. Initial claims for unemployment benefits fell to 207,000 during the week ending January 25, down from 223,000 the week prior. This metric continues to be at levels historically associated with economic growth.

For more on the labor market, read: The labor market is cooling ๐ผ
โฝ๏ธ Gas prices fall. From AAA: โEasing oil costs and tepid domestic demand helped pump prices ease up on the pedal, shedding two cents since last week to $3.11. โฆ According to new data from the Energy Information Administration (EIA), gasoline demand increased from 8.08 million b/d last week to 8.30. Meanwhile, total domestic gasoline stocks rose from 245.9 million barrels to 248.9, while gasoline production decreased last week, averaging 9.2 million barrels daily.โ

For more on energy prices, read: Higher oil prices meant something different in the past ๐ข๏ธ
๐ Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.95% from 6.96% last week. From Freddie Mac: โThe 30-year fixed-rate has hovered between 6% and 7% for most of the last two and a half years. That trend continued this week, with the average rate remaining essentially flat at 6.95%. Driven by these higher rates and a persistent supply shortage, affordability hurdles still exist for many homebuyers and a significant number of them remain on the sidelines.โ

There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million (or 40%) of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation ๐
๐ Home prices rise. According to the S&P CoreLogic Case-Shiller index, home prices rose 0.4% month-over-month in November From S&P Dow Jones Indicesโ Brian Luke: โWith the exception of pockets of above-trend performance, national home prices are trending below historical averages. Markets in New York, Washington, D.C., and Chicago are well above norms, with New York leading the way. Unsurprisingly, the Northeast was the fastest growing region, averaging a 6.1% annual gain. However, markets out west and in once red-hot Florida are trending well below average growth. Tampaโs decline is the first annual drop for any market in over a year. Returns for the Tampa market and entire Southern region rank in the bottom quartile of historical annual gains, with data going back to 1988.โ

๐๏ธ New home sales rise. Sales of newly built homes jumped 3.6% in December to an annualized rate of 698,000 units.

๐ข Offices remain relatively empty. From Kastle Systems: โPeak day office occupancy was 58% on Thursday last week, down 3.6 points from the previous weekโs high as many workers stayed home due to bad weather. Houston and Austin experienced the sharpest declines, falling to 3.1% and 14%, respectively, on Tuesday. Dallas, however, largely recovered from its weather event the prior week, reaching 67.7% occupancy on Tuesday. The average low was on Friday at 34.4%, up 3.8 points from last week.โ

For more on office occupancy, read: This stat about offices reminds us things are far from normal ๐ข
๐บ๐ธ The U.S. economy has been growing. U.S. GDP grew at a 2.3% rate in Q4, according to the BEA. For all of 2024, GDP grew 2.8%

From Joey Politano: โRising real consumption continues to power US economic growth, with the last two quarters posting some of the largest consumption growth of the last three years. That includes big growth rebounds for durable & nondurable goods consumption throughout 2024.โ

Because the way GDP is calculated includes a lot of quirky metrics that distort the economic picture, economists will often point to โfinal sales to private domestic purchasersโ to get a better sense of the underlying health of the economy. This metric excludes net exports, inventory adjustments, and government spending. This metric grew at a 3.2% rate in Q4.

For more GDP as a measure of the economy, read: The already mislabeled 'recession' of 2022 didn't happen, new data shows ๐คฆ๐ปโโ๏ธ
๐บ๐ธ Most U.S. states are still growing. From the Philly Fedโs December State Coincident Indexes report: "Over the past three months, the indexes increased in 37 states, decreased in 10 states, and remained stable in three, for a three-month diffusion index of 54. Additionally, in the past month, the indexes increased in 30 states, decreased in nine states, and remained stable in 11, for a one-month diffusion index of 42.โ

๐ Near-term GDP growth estimates remain positive. The Atlanta Fedโs GDPNow model sees real GDP growth climbing at a 2.9% rate in Q1.

For more on the economy, read: 9 once-hot economic charts that cooled ๐
Putting it all together ๐ค
The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand for goods and services is positive, and the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less โcoiledโ these days as major tailwinds like excess job openings have faded.
To be clear: The economy remains very healthy, supported by strong consumer and business balance sheets. Job creation remains positive. And the Federal Reserve โ having resolved the inflation crisis โ has shifted its focus toward supporting the labor market.
We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investorโs perspective, what matters is that the hard economic data continues to hold up.
Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth โ in the cooling economy โ is translating to robust earnings growth.
Of course, this does not mean we should get complacent. There will always be risks to worry about โ such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Thereโs also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
For now, thereโs no reason to believe thereโll be a challenge that the economy and the markets wonโt be able to overcome over time. The long game remains undefeated, and itโs a streak long-term investors can expect to continue.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents ยป
Key insights about the stock market ๐
Hereโs a roundup of some of TKerโs most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market ๐
The stock market can be an intimidating place: Itโs real money on the line, thereโs an overwhelming amount of information, and people have lost fortunes in it very quickly. But itโs also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing ๐
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 โ an index of 500 of the largest U.S. companies โ is anything but a static set of 500 stocks.

The key driver of stock prices: Earnings๐ฐ
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. Thatโs because long-term moves in a stock can ultimately be explained by the underlying companyโs earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.

Stomach-churning stock market sell-offs are normal๐ข
Investors should always be mentally prepared for some big sell-offs in the stock market. Itโs part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.

High and rising interest rates don't spell doom for stocks๐
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.

How the stock market performed around recessions ๐๐
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.

In the stock market, time pays โณ
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, youโll see that thereโs never been a period where the S&P 500 didnโt generate a positive return.

What a strong dollar means for stocks ๐
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, itโs a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.

Economy โ Stock Market ๐คทโโ๏ธ
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.

Stanley Druckenmiller's No. 1 piece of advice for novice investors ๐ง
โฆyou don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then theyโve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 ๐ฏ
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. โฆ Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine yearsโฆ The next 500 points, the next 600 points โ I donโt know which way theyโll goโฆ Theyโll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' ๐
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaacโs talents didnโt extend to investing: He lost a bundle in the South Sea Bubble, explaining later, โI can calculate the movement of the stars, but not the madness of men.โ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros canโt beat the market ๐ฅ
According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.

Proof that 'past performance is no guarantee of future results' ๐
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.

The odds are stacked against stock pickers ๐ฒ
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers arenโt able to do this on a consistent basis. One of the reasons for this is that most stocks donโt deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stockโs return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
