It has long been known that Wall Street analysts working for investment banks (the sell side) are biased towards shares going up, from which they and their employers benefit.
This chart from Kevin Gardiner, head of European investment strategy at Barclays Wealth (part of the bank on the buy side, not the sell side) shows analysts tend to start each year optimistic, then become less optimistic as the year goes on. Each line shows how S&P 500 profit forecasts for a single year developed as time went by. Only in 1988, 2005 and 2006 did they end up more positive than they started, yet hope continually overcame reality.
There’s an intriguing explanation for the bias of sell-side strategists from Dhaval Joshi at BCA Research. The way for a strategist to prosper is to be right as frequently as possible – and he should know: he is a sell-side strategist himself. Assuming that the strategist can’t forecast the market with any accuracy, that means it is best to ignore the odd period of big losses and instead focus on the higher likelihood of rises.
It is quite reasonable to assume forecasts will not be accurate, partly because of their history (chart below) but mostly because if a strategist could accurately forecast the market, they would not need to work for a living. Read more