Aim High

Frank Horrigan: I'll bet you that brown pigeon down there flies off before the white one.
Lilly Raines: How do you know?
Frank Horrigan: I know things about pigeons, Lilly.
--In the Line of Fire

Taken from this BW article, the below chart (GREAT chart format, btw) indicates that analysts nearly always over-estimate future earnings out of the gate. Their optimism usually must be ratcheted down in subsequent periods as reality unfolds.

Also note that the biggest misses correspond to recessions (91-92, 01-02, 08+), implying that analysts have trouble forecasting slowdowns and/or their effect on earnings.

Why do analysts consistently over-estimate financial performance. Perhaps analysts are just an optimistic lot by nature. Or perhaps analysts over-estimate earnings in order in order to make stocks look cheaper than they really are, which helps their firms sell more stock.

So, next time you read/hear some pundit chatting up valuations based on 'forward' earnings estimates, put your thinking caps on.