How earnings surprises can point to future market winners

It’s been a bad year for professional forecasters, especially those who failed to call the results of both the EU referendum and US election. As for those who predicted that a vote for Brexit and a victory for Trump would cause a stock market collapse… so far they’ve been wrong, too. It’s a reminder just how cautious you have to be when it comes to relying on any kind of forecast. For investors in particular, the predictions of analysts need careful handling.It’s undeniable that earnings forecasts are woven into the fabric of the stock market. But there are some who wonder why anyone bothers to listen to them. The late American economist Edgar Fiedler wrote in The Three Rs of Economic Forecasting: “The herd instinct among forecasters makes sheep look like independent thinkers.”  Meanwhile, David Dreman, the famously contrarian value investor, wrote that: “analysts’ forecasts are usually overly optimistic.”Despite the bad press that some analysts get (and to be fair, some are highly regarded), there are ways of putting their insights to good use. In October I looked at how earnings forecast ‘upgrades’ can be a clue to finding firms on the move. Another way to...