Analysts’ and Investors’ Earnings Growth Expectations for Growth Stocks

Abstract

This study investigates the earnings growth expectations of analysts and investors in relation to the performance of growth stocks. Using data from 2010 to 2023 and the Fama-French Three-Factor Model, portfolios are formed based on the Price/Earnings-to-Growth (PEG) and risk-adjusted PERG ratios to assess expectation biases. Findings indicate that analysts systematically underestimate earnings growth, leading to positive abnormal returns, while investor-based portfolios do not exhibit statistically significant negative abnormal returns—challenging the hypothesis of excessive investor optimism. Regression analysis identifies sales growth, ROE, and gross margin as key variables underlying expectation biases, with analyst coverage correlating with more optimistic forecasts and lower returns. The study contributes to understanding expectation biases in growth stock valuation and their implications for market efficiency and investment strategies.