McKinsey Study Confirms Sellside Analysts Are Conflicted, Slow, Biased And Generally Stupid

Tyler Durden's picture

In what will come as a surprise to precisely nobody, a new study by McKinsey has confirmed that sellside analysts were "typically overoptimistic, slow to revise their
forecasts to reflect new economic conditions, and prone to making
increasingly inaccurate forecasts when economic growth declined." In other words, as V.I. Ulyanov may wall have said, useless idiots, had he lived in a time when Tesla was being pitched to him at a N/M PE multiple. One only needs to recall AJ Cohen's bold (and slightly more than idiotic) 2007 prediction for an S&P at 1,675 (dot 11235813*) in 2008, when the market closed at least than half that number, to see just how utterly worthless these people and their garbage predictions truly are. Yet day after day they serve as content filler inbetween ads on CNBC, as they sucker whatever remaining viewers the propaganda organization has left into one failed investment idea after another.

Yet for those who still don't realize that the only thing sellsiders are useful for is datamining and creating pretty charts, here is some more data from McKinsey, confirming the uselessness of the sell side, and validating that sellsiders tend to be consistently off the mark...

A recently completed update of our work only reinforces this
view—despite a series of rules and regulations, dating to the last
decade, that were intended to improve the quality of the analysts’
long-term earnings forecasts, restore investor confidence in them, and
prevent conflicts of interest.2 For executives, many of whom go to
great lengths to satisfy Wall Street’s expectations in their financial
reporting and long-term strategic moves, this is a cautionary tale worth

Exceptions to the long pattern of excessively optimistic forecasts are
rare, as a progression of consensus earnings estimates for the S&P
500 shows (Exhibit 1). Only in years such as 2003 to 2006, when strong
economic growth generated actual earnings that caught up with earlier
predictions, do forecasts actually hit the mark. This pattern confirms
our earlier findings that analysts typically lag behind events in
revising their forecasts to reflect new economic conditions. When
economic growth accelerates, the size of the forecast error declines;
when economic growth slows, it increases.3 So as economic growth cycles up and
down, the actual earnings S&P 500 companies report occasionally
coincide with the analysts’ forecasts, as they did, for example, in
1988, from 1994 to 1997, and from 2003 to 2006.

they are Overoptimistic...

Moreover, analysts have been persistently overoptimistic for the past 25
years, with estimates ranging from 10 to 12 percent a year,4 compared with actual earnings
growth of 6 percent.5 Over this time frame, actual
earnings growth surpassed forecasts in only two instances, both during
the earnings recovery following a recession (Exhibit 2). On average,
analysts’ forecasts have been almost 100 percent too high.6

And completely dislocated from the actual market...

Capital markets, on the other hand, are notably less giddy in their
predictions. Except during the market bubble of 1999–2001, actual
price-to-earnings ratios have been 25 percent lower than implied P/E
ratios based on analyst forecasts (Exhibit 3). What’s more, an actual
forward P/E ratio7 of the S&P 500 as of November
11, 2009—14—is consistent with long-term earnings growth of 5 percent.8 This assessment is more reasonable,
considering that long-term earnings growth for the market as a whole is
unlikely to differ significantly from growth in GDP,9 as prior McKinsey research has
shown.10 Executives, as the evidence
indicates, ought to base their strategic decisions on what they see
happening in their industries rather than respond to the pressures of
forecasts, since even the market doesn’t expect them to do so.

In other words, if you need a lemming to type up an unoriginal, groupthink report, most certainly call up the highest rated II analyst one can find. For any other actually productive and valuable work, please avoid sell side analysts like the plague (airborne and highly virulent edition).

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Robslob's picture

Spaceballs...The Movie!

jwo1908's picture

My question is who paid money for this report?  This study has already occurred in academia.  So either someone explicitly paid for the report, or McKinsey just charged their existing clients via per diems and higher billable hours?  Either way, nothing new in this report that has not been stated in other places.

rsi1's picture

Its probably the usual consulting work, not worth paying for, I would guess they were so bored after spending 12 hours per day discussing what font they should use in their reports, that they decided to work 15 hours per day and squeeze this one for free. Copy Paste, copy paste, change every single word and do group thinking regarding which expressions to use, wether to use present tense, past, etc.. I, We, Them or Us, the others, etc.. Then spend the remaining 50% of the time available on decoration so that it looks professional, the charts look good, etc.. and job done! another mckinsey job done! (or any other high quality and high value added consulting company)

Cleanclog's picture

Because they are PAID to be optimistic!

Same with CNBC robo-espousers of equity buying as patriotic.

Cognitive Dissonance's picture

Spend some time on Madison Avenue and learn their industry slang. "Content" is considered the advertisements themselves and the "filler" is what's between the advertisements that's designed to hold the viewer in their seats until the next series of "content" is presented for consumption. So the filler is the actual "show" that keeps people in their seats and primed for the "content" advertisements.

Thus with CNBC/FOX/Bloomberg etc, the advertisements are the "content" while the analysts, reports, interviews and so on is simply filler to get you from one set of advertisement spots to the next. Since the "filler's" sole purpose is to keep you in your seats and tuned in, it must be attractive and pleasing. From that point of view, bad news is not only to be avoided but to be smoothed over as best as they can.

Listen to how the CNBC "anchors" discuss their own "filler". It's a "show", not a news presentation. It's an act, an opera, staged for our viewing pleasure to get you and I to the next advertisement. Of course, there are even embedded advertisements now, such as Rick Santelli's "Bond Report" brought to you by PimpCo.

thesapein's picture

Nice, I see what you did there. Very nice.

But I look up and see my browser has no less than 3 adds surrounding this comment as I type... what to think?

marc_hanes's picture

I'd suggest using Firefox with the appropriate plug-ins. Ads on ZeroHedge? I never see any.

thesapein's picture

Well, now, that doesn't do nice ZH. 

knukles's picture

And just how much did this epiphany of the apparent cost some slow, biased and generally stupid person to commission McKinsey to confirm sell side analysts are conflicted, biased and generally stupid?

vote_libertarian_party's picture

Wow, I learned this after I was trading for...5 days.

I'm guessing they spent $10m to get the same analysis.

TexDenim's picture

You can download the full study at the McKinsey site:

Rainman's picture

Many pump-side analysts today are direct descendants of seers and carnival barkers. It's nice to see a report that keeps score on their accuracy. Hope more people than the ZH crowd see it......doubtful.

Their credibility is right there with Big Pharma and their pill pushing racket on the TV nightly news. Ignore it all.

Careless Whisper's picture

at least carnival barkers are entertaining. i think the analysts are there for the sole purpose of perpetuationg the scam of a legit market.


TooBearish's picture

No one pays hard dollars for this sell side tripe, its mostly for the HNW brokers that need something that looks complicated and researched to justify charging their clients 100bps to hold their stocks....

Blues Traveler's picture

Mckinsey opinion doesnt come cheap.  They are great at playing the power of the business card, so they would not write an article of this nature unless they see something on the horizon. 

As great testament to current spiritual & mental environment of our times.  My CPA set me up with a grilfriend of hers last week.  A blond with gianormus fake titts, steps out of a leased hummer and wearing rolex. Things look promising until I learned she is on unemployment......WTF?

Anal_yst's picture

Please don't pretend like Abby Joseph Cohen's 2008 S&P prediction wasn't anything short of unbelievable!  Come on, give credit (for insane predictions) where credits due!

Reese Bobby's picture

Yes. Helmet head is the Man!

Pegasus Muse's picture

Actually in my viewing area:   

" Yet day after day they serve as content filler inbetween gold ads on CNBC, as they sucker whatever remaining viewers the propaganda organization has left into one failed investment idea after another. "

Apostate's picture

Analysts are marketers. They advertise shares in companies while purporting to be neutral. 

RhoRhoRhoBoat's picture

I read this post on a few weeks ago. You guys are getting sloppy

lizzy36's picture

The sell side only works when market goes higher....duh.  Their whole business model is predicated on a rising market.

So is it any wonder when a sell side analyst believes that the broad indices are going higher, and every stock that pays them corporate finance revenue, or that they are a top 5 trader of (secondary offering determinant) is going higher?

In fact the business model of the United States is now predicated on the market only going higher.  Which is why it has allowed itself to become the ultimate Ponzi scheme.  

knukles's picture

Yeah yeah, gotcha, like a rising turd lifts all boats or sumptin' like dat. 

yoganmahew's picture

What did the study have to say about McKinsey analysts?

(I'll give you a hint - the words "bleedin' obvious", "stating" and "Mine's a frappo-mocha-skinny-latte" and the symbols $$$).

Misean's picture

Sell siders on SNBS are the equivalent of product placement ads...only far more harmful.

anarchitect's picture

"when Tesla was being a N/M PE multiple"

What's an "N/M PE multiple"? The equivalent of NaN, #DIV/0!, or something to do with a negative number?

Miles Kendig's picture

Now even McKinsey is waking up to why investors no longer wait for the phone to ring to say fuck off.

knukles's picture

Ouuuuuuuhhhhh.  Maybe McKinsy's own phones ain't a ring-a-dingin' so good right now.

Miles Kendig's picture

The epic tragedy that is damaged relationships between the buy & sell side.... And the dawning realization for both that they're being told to fuck off by investors even before the phone is reached for.  Welcome to the new paradigm pilgrims of disconnect between the rulers and the near total disbelief of societies rulers by society itself.

stickyfingers's picture

Funny, after all these years I thought they were just drunk, not stupid.

Privatus's picture

The irony is the McKinsey report is actual research, while the sell-side research is anything but.

Astute Investor's picture

Long-term annual EPS growth (nominal) has been approxinately 7% over the past 75+ years so the 6% cited by McKinsey would appear to make sense.  Conversely, I have always snickered at analysts forecasting low double-digit earnings growth ad infinitum.  The mental midgets have taken their egregiousness to a whole 'nother level with the current consensus earnings forecasts of +34% in 2010 and +20% in 2011.

dellbalboa's picture

Only reporting the obvious, 

dellbalboa's picture

great example of sellsiders, Mike ''spectacular'' Norman and Art Laffer '' The laffer curb'' 

Grand Supercycle's picture

XAUUSD / XAUEUR / XAUAUD bearish warnings issued since July 1 continue . . .

Blues Traveler's picture

 Grand, I always like your work and your track record speaks for the way, what is up with the new Avatar?