Chasing unachievable profits

Geoff Colvin

Fortune

“Brace yourself for an increase in stupid, misleading, or illegal action by U.S. companies,” said Geoff Colvin. Expectations for corporate profits are “insanely optimistic” right now, and when companies fail to deliver the miracles Wall Street is forecasting, managers may start misbehaving. Many analysts are predicting double-digit profit growth this year, even though corporate profits are already near post–World War II record levels. “It makes no sense” to think they’ll climb still higher, especially given “America’s creeping economy, slowing growth in Asia, and potential cataclysm in Europe.”

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These unrealistic expectations come from analysts who “tend to fall in love with the companies they’re covering” and don’t forecast for the market as a whole. Managers then try to meet those expectations, even if it means “doing things they shouldn’t,” like slashing investments that pay off in the long term or “playing the accounting rules like a fiddle”—not to mention resorting to fraud. The wise investor will look past the irrational exuberance and see that these profit expectations are “clearly in fantasyland.”