While the pandemic disrupted businesses across the globe, money mangers still maintained their misguided confidence in their earnings forecasts, according to a recent paper from the University of Iowa that is cited in an article in Bloomberg. The study found that financial professionals are only correct about 30% of the time about their companies’ earnings, and those inaccurate predictions influence the earnings estimates that Wall Street analysts put out. Given that pipeline, it’s easy to see why such a low percentage of companies actually generate earnings that are close to those estimates. In the first quarter of 2023, only 3% of companies produced earnings that were within analysts’ estimates.

“Managers…way overestimated” when asked for an “honest assessment” of their companies’ earnings, says one of the authors of the study, Paul Hribar. While some of that could be pinned on ego, much of it is also due to miscalibrations, of which there were many in this year’s first quarter, both good and bad. For example, retail giant Target outperformed its first-quarter earnings guidance by 15 cents a share, only to then publish an outlook unchanged from its previous view. Meanwhile, Marriot International beat its forecast so decisively that it upped its guidance for 2023 by 50 cents a share. And even in the face of market volatility and lingering pandemic uncertainty, managers in general seem to be very optimistic and confidence in their predictions, with most of those surveyed maintaining their overall guidance policy in spite of pandemic disruptions, the article reports.

Financial managers were also interviewed for the research, and many of them confessed to harboring secretly optimistic earnings expectations while giving much more conservative guidance to their clients—a revelation that might explain why about 75% of earnings “surprises” are to the upside, according to Bloomberg data. Notes Hribar, “Managers seemed willing to say, ‘That is how the game is played. We want to beat the estimates.” 357 CFOs, upper management executives, and investor-relations professionals at public companies were surveyed for the study in 2021.