Top down approach - Equity Mkt Valuation

[simplex]

Top Down approach (equity market valuation reading 19)
why is top down approach more optimistic when the economy is heading into a recession than the bottom up approach?

 

[cpk123]

• bottom up approach - all individual companies have already started to reflect their pessimism in their forecasts and this propagates up to the economy.
• In a top down - economy has to first say it is doing badly - then individual companies have to realize that and reflect it. However various analyst biases - typically overconfidence and conservatism and/or anchoring and adjustment biases take over - and a higher (rosier) picture is painted.

 

[simplex]

Top Down Approach:

• Uses Macro economic projections for returns of Stock Markets / Indices
• Compares Relative values of each Equity Markets to their Historical Values to determine if themarket is cheap or expensive.
• Analysing past trends

Because of using Historical values, past trends and other Top Down Analysis this approach is not able to predict timely any major change in key economic variables or coming up recession.

 

[Palantir]

You have it backwards:
“Thus, bottom-up estimates may be more optimistic than top-down heading into a recession, and more pessimistic than top-down coming out.”
Page 143

 

[simplex]

You have it backwards:

“Thus, bottom-up estimates may be more optimistic than top-down heading into a recession, and more pessimistic than top-down coming out.”

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To this question I feel that:

top down is unable to predict trend reversals in an economy due to its reliance on historical values, trends and macro econometric models.

therefore, recession or expansion anything away from normal trend should be difficult to predict.