(Bloomberg) – With bond yields rising and inflation expectations rising, this seems like an odd time for optimism among Wall Street’s stock handicappers.
But that’s exactly what it did. And the reasons provide an overview of what kept the worst three-day decline in stock markets since October from spiraling further out of control this week.
It was hard to tell, but while the markets tumbled, equity strategists from investment firms were busy raising their earnings estimates for S&P 500 companies. This brought the earnings projections of these top-down forecasters in line with a much larger number of corporate analysts, the individual stock researchers, who follow individual companies.
While no one believes the published opinions of strategists are of particular importance in the daily movement of stock prices, the phenomenon shows a dynamic that has supported stocks for more than a year. The slow and almost invisible improvement in corporate earnings, accompanied by growing inflation fears and blotchy data, continues to put an end to the sell-off.
“It will be difficult to make a deep correction when the economy is very strong and earnings revisions are still moving rapidly,” said Keith Lerner, chief market strategist at Truist Advisory Services. “It’s just a pullback pad, and that’s exactly what we saw this week.”
Dennis Debusschere, Head of Portfolio Strategy at Evercore ISI, was one of the strategists who raised earnings estimates in the face of a share price sparked by fears of inflation. Citing an unexpectedly rapid recovery in corporate activity, he raised his 2021 forecast for S&P 500 companies by $ 6 to $ 182 per share.
“Inflation tends to be higher and supply chain disruptions pose a potential threat to profitability, but management sentiment towards margins has continued to rise,” he wrote in a statement to customers earlier this week. “Until that trend is reversed, strong sales growth and strong pricing power support,” he said.
Slowly but firmly, Wall Street has come to terms with the resilience of American corporations. Profits, which did not decline as much as feared during the initial pandemic lockdowns, are now recovering faster than expected. The net result: earnings recovery expected to take years to come by June, a span of just five quarters.
When this reporting season began five weeks ago, analysts’ earnings estimate for 2021 for S&P 500 companies was $ 174 per share. After nearly every company beat expectations, expected income rose 5.7% to $ 183.90 per share. This was the second-fastest upgrade pace since Bloomberg began tracking the data in 2012, which was only surpassed in the 2018 cycle in response to President Donald Trump’s tax cuts.
The development of top-down strategists showed a similar pattern: forecast earnings rose around 4% to $ 185 per share last month.
But this is where the consensus ends. When it comes to where the market is going, the two groups of forecasters couldn’t be further apart.
With the S&P 500 nearly doubling in 14 months, the strategists being pursued by Bloomberg urge customers to be cautious. Even after a series of upgrades, the 2021 average target price is 4,199, within 0.1% of the index closing on Friday. In other words, they see little room for upward movement.
On the flip side, bottom-up researchers who focus on individual stocks – the buy / hold / sell amount that goes into making the results public – are far more optimistic. Based on the aggregated price targets, they say the S&P 500 needs to run an additional 11% from here.
This divergence is the second largest in Bloomberg data from 2004 at this time of year.
So who are you supposed to believe? Neither side has a monopoly of wisdom – there is little record showing that anyone is consistently right about stocks.
Marc Odo, client portfolio manager at Swan Global Investments, is on the strategist’s side, noting that analysts may be too focused on the micro-side of the company and fail to see the bigger picture.
Some strategists, including Morgan Stanley’s Mike Wilson, have warned against extrapolating recent robust results to the quarters ahead, as supply and labor shortages are likely to hurt earnings. Others, like Bank of America’s Savita Subramanian, cited stretched valuations and impending headwinds such as tax hikes and central banks turning back monetary stimulus as reasons to be cautious.
“If you get a large cross-section of analysts, everyone will be bullish in their specific niche, and that creates a bullish consensus,” Odo said. “As someone approaches from top to bottom like the strategists, they look more at the forest and may be able to spot those weak spots.”
For Truist’s learner, strategists may be forced to catch up if the market continues to march higher.
“The strategists are much slower because they deal with macro trends,” he said. “You will either be stuck with your view and say that it is already priced in, or you will see that with a delay.”
For more articles like this, please visit us at bloomberg.com
Subscribe now to stay ahead of the curve with the most trusted business news source.
© 2021 Bloomberg L.P.