A better than expected US earnings season has prompted a flurry of “buy” recommendations on stocks, with analysts now as upbeat as they have been in almost two decades.
Data from Morgan Stanley show the percentage of buy ratings has hit its highest point in 18 years, at the same time as the S&P 500 index (.SPX) and the tech-heavy Nasdaq Composite (.IXIC) both reached records levels in the week of July 26.
But the slowing pace of economic growth should spark caution from analysts as they look towards the end of the year and into 2022, according to David Lebovitz, markets strategist at JPMorgan.
Annualised economic growth in the US is running at a pace of 6.5 per cent, according to data released on Thursday — below expectations but still bringing output back up to pre-pandemic levels.
“It feels like a little bit of the analyst community has missed the mark so significantly for the past year, they’re now recalibrating their outlook based on what we’ve seen rather than what they in reality should be expecting,” Lebovitz said.
S&P-listed groups are expected to report more than 60 per cent earnings growth in the second quarter compared with last year, according to FactSet Data. Among the almost 90 per cent of companies in the S&P that have filed second-quarter earnings, JPMorgan (JPM), Facebook (FB) and Apple (AAPL) have all reported double-digit earnings growth from the same time in 2020.
“The macro picture is very, very different coming out of a pandemic. There’s enormous pent-up demand and there’s enormous fiscal stimulus,” said Max Gokhman of Pacific Life. “We didn’t have any of that around the dotcom period or the [Sarbanes-Oxley] period, really. We didn’t even really have that in 2009 post the financial crisis.”
Before the passage of the Sarbanes-Oxley Act in 2002, problems with conflicts of interest and incentive practices fostered sky-high rates of buy recommendations.
Now, some analysts have expressed concern about the longevity of elevated earnings, because of rising input costs, supply chains issues and upward pressure on wages.
“I have a bit of a concern because the reason margins have been going up is because companies have been able to pass higher costs down to their consumers. If consumers start really saying ‘hey, we’re not comfortable with paying more for whatever goods or services that we’re getting, the jig is up’, that can be pretty disastrous given just how stretched margins are,” Gokhman said.
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