Top-Down vs. Bottom-Up Index Forecasts: Are Market Strategists Strategically Pessimistic?

46 Pages Posted: 2 Feb 2024

See all articles by Min Park

Min Park

University of Kansas - Accounting and Information Systems Area

Matt Peterson

University of Kansas - Accounting and Information Systems Area

Eric H. Weisbrod

University of Kansas - School of Business

Date Written: January 15, 2024

Abstract

Darrough and Russell (2002) find that top-down S&P 500 EPS forecasts made by market strategists are more pessimistic, on average, than comparable bottom-up S&P 500 EPS forecasts aggregated from sell-side analysts’ firm-level forecasts. We find that strategists’ relative pessimism varies systematically with macroeconomic conditions. In turn, strategists’ relative pessimism has predictive value for future aggregate earnings surprises and aggregate stock returns, consistent with sell-side analysts and investors underreacting to the information contained in strategists’ index forecasts. We find that the predictive ability is concentrated during periods of macroeconomic uncertainty. Strategists’ relative pessimism also predicts future firm-level earnings surprises and their market reaction. Finally, we support our conclusion by demonstrating that top-down forecasts exhibit superior quality over bottom-up forecasts. Overall, investors and policy makers can benefit when they use both bottom-up and top-down forecasts in combination when forming expectations for aggregate earnings.

Keywords: aggregate earnings, market strategists, top-down EPS forecasts, bottom-up EPS forecasts, financial analysts

JEL Classification: M41, G14, G23, G24, G32

Suggested Citation

Park, Min and Peterson, Matt and Weisbrod, Eric H., Top-Down vs. Bottom-Up Index Forecasts: Are Market Strategists Strategically Pessimistic? (January 15, 2024). Available at SSRN: https://ssrn.com/abstract=4695279 or http://dx.doi.org/10.2139/ssrn.4695279

Min Park (Contact Author)

University of Kansas - Accounting and Information Systems Area ( email )

1654 Naismith Drive
Lawrence, KS 66045
United States

Matt Peterson

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

Eric H. Weisbrod

University of Kansas - School of Business ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

HOME PAGE: http://https://business.ku.edu/eric-weisbrod

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