Stock market woes finally convince recalcitrant analysts to get real

(Bloomberg) – Even diehard bulls are giving in to recession angst.

Wall Street analysts, the majority of whom clung to buy ratings and upbeat earnings forecasts as markets cracked, are showing signs of giving up. On a net basis, they issued more than 500 downward revisions to stock price targets and earnings estimates for S&P 500 stocks over the past five sessions, data compiled by Sundial Capital Research and Bloomberg show.

Such a frenetic pace of downgrading is rare. This has only happened four other times since data began following the global financial crisis.

Top-down forecasters who make market predictions based on major macroeconomic trends also backtrack on their optimism. Strategists at UBS Group AG and Evercore ISI were the last to be forced to tame their outlook.

Analysts had been ridiculed for stubbornly clinging to their bullish outlook – many stocks still carry forecasts that require a doubling in price or more to achieve – as stocks slid into a bear market. The latest wave of downgrades likely means little to investors who have reduced their equity exposure to multi-year lows.

Still, sour sentiment is a welcome development for market watchers on the lookout for further signs of capitulation they hope to pave the way for a sustained rally in equities. It also lowered the bar for U.S. companies to cross when their second-quarter newsletters start rolling in.

“Analysts want to get out ahead of what are widely assumed to be killer earnings reports starting this week,” Jason Goepfert, director of research at Sundial, wrote in a note. “With a lot of professional risk, analysts suffer from the same biases as investors, and the herd mentality is evident when markets are doing well (or badly). They’ve started panicking recently, which has been a constant signal to do the opposite.

Stocks started selling again on Monday after the S&P 500 posted its second weekly gains in three. After falling 24% from January to its June low, the benchmark remained stuck in a 250-point range, failing a second time to break resistance near 3,900.

Analysts had been slow to react to the liquidation that prompted traders to dump stocks in droves. Their 2023 earnings estimates have remained buoyant this year despite the Federal Reserve’s aggressive inflation-fighting campaign and a raging war in Europe. While some have lowered their price targets, the reduction pales in comparison to the sell-off that wiped out as much as $15 trillion in stock value.

In the four previous instances where analysts rushed to downgrade, stocks rebounded sharply in the following months once all fears proved to be overblown.

Whether the pattern can repeat itself is anyone’s guess. Currently, analysts expect S&P 500 companies to earn $246.1 per share next year. This implies a price-earnings multiple of around 16 – not too expensive, but not cheap either.

For Keith Parker, head of US equity strategy at UBS, a lot depends on the outcome of a recession. If consumers rein in spending and cause a slight contraction, the S&P 500 would fall to 3,400 in December. But a scenario where inflation slows significantly and growth remains solid would indicate upside potential to 4,500.

While Parker expects the economy to avoid a recession this year, a slowdown, along with persistent inflation and rising real yields, prompted him to lower his year-end target for the index at 4,150 against 4,850.

He’s not the only one to have his optimism curtailed amid a cacophony of obstacles. Julian Emanuel, head of equities and quantitative strategist at Evercore ISI, just cut his S&P 500 forecast by 100 points to 4,200 over the weekend.

“A downturn is underway,” Emanuel said. “Combined with a stronger dollar, tight labor markets, supply chain issues and inventory builds, margins and EPS are under pressure as potential recessionary scenarios develop. .”

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