Wall St Estimates Still Excessively High – Study

NEW YORK (Reuters) – Wall Street analysts, keen to pleaseemployers intent on winning business, continue to overstateexpected corporate earnings growth, even as concerns about theU.S. economy mount, a study said on Thursday.

The findings of the study by finance professors at PennState University come five years after 10 Wall Street firmsagreed to pay $1.4 billion to settle charges that they issuedbiased research in order to win investment banking business.

The study, however, found that the investigation intobiased research spearheaded by then-New York Attorney GeneralEliot Spitzer and the resulting fines had no effect onanalysts’ growth-rate forecasts.

"Analysts are rewarded for biased forecasts by theiremployers who want them to hype stocks so that the brokeragehouse can garner trading commissions and win underwritingdeals," the study says.

According to the study, U.S. earnings forecasts areexcessively high, at two times historic gross domestic productgrowth.

The study’s authors examined analysts’ long-term andone-year projected annual profit forecasts for all companiesfrom 1984 to 2006.

Their findings show that analysts consistently projectedearnings per share growth rates much higher than actual growthand that firms rarely meet or exceed their projected profitestimates.

Gross domestic product growth over the past 40 years hasaveraged 7.4 percent annually, while long-term, or on a three-to five-year basis, growth in earnings per share was forecastat 14.7 percent on average from 1984 to 2006, the study shows.

That compares with actual long-term EPS growth of 9.1percent, it said.

The study echoes what many Wall Street strategists havealready been saying about profit projections.

Strategists say 2008 profit forecasts are unrealisticallyhigh, and need to come down to reflect the current U.S.economic climate, which U.S. Treasury Secretary Henry Paulsonthis week said was in "sharp decline."

"Consensus numbers are often just too high," Abby JosephCohen, president of Goldman Sachs’ Global Markets Institute,said this week. "Economic conditions have clearly deterioratedover the last few months, and we don’t think that has beenreflected in the consensus number."

For all of 2008, analysts are projecting earnings growth of14.8 percent for Standard & Poor’s 500 companies, ReutersEstimates’ data shows, but many strategists are predicting muchlower gains and some say earnings could even be flat for theyear.

For the 2008 first quarter, earnings for S&P 500 companiesare now expected to fall by 2.7 percent from a year earlier.Two weeks ago, analysts on average were expecting a 0.4 percentrise.

The projections are based on a compilation of S&P 500forecasts from Wall Street strategists and industry analysts.

(Editing by Leslie Adler)