Expectational Analysis

Expectational analysis enables analysts to forecast the economy’s future direction based on current data or trends. The risk involved in forecasting is that, analysts cannot measure the accuracy of their estimates at the time they are made. Expectational analysis takes into consideration the current financial environment and the assumptions behind the estimates and it constantly monitors the data produced in order to identify any changes in the environment or violation of the analyst’s assumptions.

Expectational Analysis is concluded in four stages.

In the first stage, Expectational Analysis forecasts broader economic, political and demographic trends. This stage includes assumptions about monetary and fiscal policy, political conditions and initiatives, trade partnerships and others.

In the second stage, Expectational Analysis relates the macroeconomic forecasts to certain sectors of the economy. The aim is to identify how GDP components such as consumption, investment, government spending and net exports change over time.

In the third stage, Expectational Analysis relates the macro and sector forecasts from the previous stages to industry analysis. The microeconomic analysis estimates price elasticity, competitive positioning and other micro and macro trends that are particularly relevant to the industry specialization.

In the fourth stage, Expectational Analysis adapts economic and industry analysis to the individual firm. Within this context, analysts use the Porter’s Five Forces Model which identifies five forces that could affect the competitive structure of the firm. These forces are: (1) bargaining power of suppliers, (2) bargaining power of buyers, (3) threat of new entrants, (4) potential substitutes and (5) current rivalry.

Expectational Analysis tracks the relationship between the estimates of an analyst and the expected industry performance aiming to weigh the implications of potential new information on the original industry analysis and economic outlook. To do that, after each stage of Expectational Analysis is concluded, relevant variables are produced in order to be monitored in relation to the forecasts made. In case of violation of the analyst’s assumptions, estimates are reviewed and adjusted to the new market realities so that investors receive accurate information on the state of the economy and expectations for future stock-market performance.