Top-Down Bottom-Up Earnings
<p>Nov 6, 2008 9:58 PM</p>
<p>
from  a book by Jermey Siegel</p>
<p>
Aggregate Earnings Estimates</p>
<p>
When Wall St estimates future earnings , it invariably estimates OPERATING earnings, cuz
analysts cannot predict when a firm will take special charges.   The difft estimates are uses
for big groups like SP500.</p>
<p>
First... the bottom-up method is to just ADD UP all the individual estimates of the firms in the index.
The second method is called top-down ... and is formulated by economists  who forecast
macro-economic variables as GDP, unemployment, and interest rates and fit these forecasts to past rtrends
in aggregate earningns.</p>
<p>
These can differ signif.</p>
<p>
 Bottom-up, derived from indiv anaylsts formcasts are almost always too high,
cuz they're bas4ed on managments overly rosy estimates of future profits.</p>
<p>
Usu bottom-up estimates get reduced over time.
Top-down is freq more realistic, but it may miss new cost-saving measures and
productivity enhances not observable in past data.
Unforeseen events can cause wide misees (like 9/11)</p>