Surprise! S&P Thinks It Can Forecast Earnings Swings

Standard & Poor’s Capital IQ research unit said it has developed a method of forecasting negative and positive earnings surprises of a magnitude of 5% or larger.

These, it said, will be forecast using an “intelligent estimate” on existing earnings estimates for stocks, which will in turn be weighted by:

• Age of estimate, since newer estimates contain more information and represent the most complete forecast of what a company will report.

• Broker size, since larger brokers tend to attract and retain analysts that provide more accurate forecasts.

• Forecast horizon, because forecasts made closer to the company report date presumably will embed more information into the forecast.

• Analyst tenure, since individuals covering stocks for a long time tend to provide more accurate forecasts.
"Intelligent Estimates provide an edge for investment professionals, particularly during the busy, high workload earnings season," said Carson Boneck, managing director, S&P Capital IQ. "By comparing the intelligent estimate to the traditional consensus estimate, investment professionals will be provided with a quick snap shot of where earnings surprises are likely to occur."

S&P Capital IQ said it expects the intelligent estimates to reduce forecast errors about 14% in the United States and 10% internationally.

In addition, it expects to predict 62% of earnings surprises greater than 5% in either direction in the United States and 58% abroad.

The S&P Capital IQ Estimates database covers more than 18,600 companies in more than 100 countries. History goes back to 1999 in the United States and 1996 internationally.

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