Uploaded March 2026 | Updated September 2026, 1 week ago
In this session, we look at equity research analysts and consider whether following their advice is a market-beating strategy. We begin by looking at earnings estimates from analysts and note that while they are better predictors of actual earnings than time series models (which use only past earnings), the improvement in accuracy is modest and primarily in short term forecasts. We also note that revisions made by analysts to earnings estimates often generate short-term price momentum in stocks, perhaps because analysts can get clients to trade on those revisions. Finally, we look at analyst recommendations, by first reporting on the bias in the process (with positive recommendations vastly outnumbering negative recommendations) and then looking at the price impact of these recommendations. We note that sell recommendations have larger, long-term price impact than buy recommendations and that some analysts have more impact than others, either because their recommendations are built around stronger narratives or because they have more institutional following. A strategy of investing based upon analyst recommendations is unlikely to yield high returns unless it is focused on smaller, less followed companies and more influential, unbiased analysts.
Playlist for class (Intro + 42 sessions): youtube.com/playlist?list=PLUkh9m2BorqnZGADa8cTzeJblmrZY_SqP&si=zI2pk17pJeld4nWR
Slides: https://www.stern.nyu.edu/~adamodar/pdfiles/invphilslides25/session24.pdf
Post-class test: https://www.stern.nyu.edu/~adamodar/pdfiles/invphilcertificate/postclass/session24test.pdf
Post-class solution: https://www.stern.nyu.edu/~adamodar/pdfiles/invphilcertificate/postclass/session24soln.pdf
In this session, we look at equity research analysts and consider whether following their advice is a market-beating strategy. We begin by looking at earnings estimates from analysts and note that while they are better predictors of actual earnings than time series models (which use only past earnings), the improvement in accuracy is modest and primarily in short term forecasts. We also note that revisions made by analysts to earnings estimates often generate short-term price momentum in stocks, perhaps because analysts can get clients to trade on those revisions. Finally, we look at analyst recommendations, by first reporting on the bias in the process (with positive recommendations vastly outnumbering negative recommendations) and then looking at the price impact of these recommendations. We note that sell recommendations have larger, long-term price impact than buy recommendations and that some analysts have more impact than others, either because their recommendations are built around stronger narratives or because they have more institutional following. A strategy of investing based upon analyst recommendations is unlikely to yield high returns unless it is focused on smaller, less followed companies and more influential, unbiased analysts.
Playlist for class (Intro + 42 sessions): youtube.com/playlist?list=PLUkh9m2BorqnZGADa8cTzeJblmrZY_SqP&si=zI2pk17pJeld4nWR
Slides: https://www.stern.nyu.edu/~adamodar/pdfiles/invphilslides25/session24.pdf
Post-class test: https://www.stern.nyu.edu/~adamodar/pdfiles/invphilcertificate/postclass/session24test.pdf
Post-class solution: https://www.stern.nyu.edu/~adamodar/pdfiles/invphilcertificate/postclass/session24soln.pdf
