Aggregate Earnings Expectations and Stock Market Behavior

The paper examines the degree of association between cross-sectional aggregate measures of earnings forecasts and the market rate of return. Various measures of “market” earnings forecasts are devised. The results indicate that while changes in earnings forecasts of individual companies are correlated with the price behavior of the respective stocks, very weak association exists between the aggregate measure of earnings forecasts and the market rate of return. This lack of association (which suggests that information on aggregate changes in earnings forecasts is not very useful to investors) is due primarily to the very low commonality in the revisions of earnings forecasts across companies.