Business & Investment

The short strategist caught is a stealth stock market promoter

By Lu Wang and Claire Ballentine

This seems like a strange time for optimism to break out, as bond yields are skyrocketing and inflation expectations are skyrocketing. Wall streetStock handicap.

But that’s exactly what it did. And that’s why it provides a lens for why the worst three-day decline in the stock market since October prevented further runaway this week.

It was hard to notice, but as the market slumped, brokerage equity strategists were busy spiked earnings forecasts for S & P 500 companies. This brings profit forecasts from these top-down forecasters to match far more corporate analysts, single-cap researchers who follow individual companies.

No one believes that the strategist’s public opinion is particularly relevant to the day-to-day movement of stock prices, but this phenomenon shows the dynamics that have supported stocks for over a year. In short, the slow, almost invisible improvement in corporate profits associated with inflationary instability and uneven data growth continues to be offered for sale.


Keith Lerner, Chief Market Strategist at Truist Advisory Services, said: “It only provides a pullback cushion, which is exactly what we saw this week.”

Dennis Debusschere, head of portfolio strategy at Evercore ISI, was one strategist who raised earnings estimates in the face of a stock market crash caused by inflation concerns. He raised the 2021 forecast for S & P 500 companies from $ 6 to $ 182 per share, citing a faster-than-expected recovery in corporate activity.

“Inflation is on the rise and supply chain disruptions are a potential threat to profitability, but management sentiment towards margins continues to rise,” he wrote in a note to customers earlier this week. “Until that trend reverses, strong top-line growth and strong price dominance support,” he said.

Slowly but powerfully, Wall Street agreed with the American resilience of the enterprise. Earnings, which did not fall as feared during the first pandemic blockade, are now recovering faster than expected. Ultimate result: The recovery in profits, which was expected to take several years, is expected to be completed by June in just five quarters.

When this reporting season began five weeks ago, analysts’ S & P 500 companies had a 2021 earnings forecast of $ 174 per share. Expected income increased 5.7% to $ 183.90 per share after almost all companies crushed expectations. This is the second fastest upgrade pace since Bloomberg began tracking data in 2012, and cuts only exceeded in the 2018 cycle in response to President Donald Trump’s taxes.

The trajectory of top-down strategists shows a similar pattern, with earnings forecasts of $ 185 per share up about 4% last month.

But that is the end of the consensus. When it came to where the market went, the two groups of prophets couldn’t be further separated.

U.S. earningsBloomberg

The S & P 500 has almost doubled in 14 months, and the strategists that Bloomberg is tracking are telling clients to be careful. Even after a series of upgrades, the 2021 price target averages 4,199, within 0.1% of where the index ended on Friday. In other words, they see little room for upwards.

On the other hand, bottom-up researchers focusing on single-cap stocks, the buy / hold / sell crowds that weigh heavily when results are disclosed, are fairly bullish. Based on the total price target, they say the S & P 500 has an additional 11% to run from here.

This difference is the second widest at this time of the year, according to Bloomberg data dating back to 2004.

S & P 500Bloomberg

So who do you believe in? Neither side monopolizes wisdom-there are few records that everyone is consistently correct about stocks.

Marc Odo, client portfolio manager at Swan Global Investments, stands on the side of the strategist, noting that analysts may be too obsessed with the microscopic aspects of the business to get the big picture.

Several strategists including Mike Wilson Morgan StanleyWarns against extrapolating the latest solid results in the coming quarters, as supply constraints and labor shortages can hurt profits. In addition, Bank of AmericaSabita Sabramanian pointed out the postponed valuation and the looming policy headwinds such as tax increases and the central bank rolling back monetary stimulus measures as reasons for caution.

“A large cross-sectional area of ​​an analyst creates a bullish consensus in a particular niche,” says Odo. “People approaching from top to bottom, like strategists, are looking more at the forest and may be able to identify patches for their weaknesses.”

For Truist’s Lerner, as the market continues to rise, strategists can be forced to catch up.

“It’s much slower because strategists are looking at macrotrends,” he said. “They sit firmly in their view and say it’s already priced, or you’ll see it more late.”

The short strategist caught is a stealth stock market promoter The short strategist caught is a stealth stock market promoter

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