Accuracy of consensus expectations for top-down earnings per share forecasts for two S&P indexes

In this paper, we examine the top-down forecast accuracy and divergence of market strategists for quarterly Earnings Per Share (EPS) forecasts for the S&P400 and S&P500 Indexes using the I/B/E/S summary database. We find that such forecasts are, on average, optimistically biased, and that the bias increases with an increase in the number of reporting market strategists and the coefficient of variation of such forecasts. We find that our nondirectional measure of forecast accuracy indicates that accuracy deteriorates with increasing default and term premia (two priced APT factors). Our findings have implications for the asset allocation decisions and markettiming practices of professional fund managers.