The S&P 500 is up more than 100 per cent over the past 17 months, but analysts aren't concerned by the fastest doubling in history. They're bullish – very bullish. The percentage of analysts issuing buy ratings has hit levels unseen since the Sarbanes-Oxley Act was passed in 2002, according to Morgan Stanley.
Pre-2002, buy recommendations were dime a dozen, but regulatory restrictions resulted in the percentage of buy ratings falling below 50 per cent in the noughties. It crept higher in the years following the global financial crisis but has really spiked in 2021, with buy recommendations now accounting for almost 60 per cent of all ratings. Market strategists are also getting more aggressive. Bank of America’s (BofA) Sell-Side Indicator, which measures strategists’ average equity allocation recommendation, is at its highest level since May 2007. Bulls argue such enthusiasm is justified by soaring earnings. Almost nine in 10 companies (88 per cent) have beaten estimates this quarter – the highest figure on record, according to Refinitiv. Profits are 17.2 per cent above estimates, which FactSet notes is way above the five-year average of 7.8 per cent.
Similarly, 88 per cent have trumped revenue expectations, compared to a five-year average of 65 per cent. Revenues are 4.5 per cent above estimates, comfortably above the five-year average of 1.2 per cent. Still, the obvious problem is that valuations are similarly high; the S&P 500 trades on 21.2 estimated earnings, well above its five- and 10-year averages of 18.1 and 16.2, respectively. Right now, investors aren't bothered. Not only is the market rewarding positive earnings surprises more than average, says FactSet's John Butters, it is punishing negative earnings surprises less than average. That's odd, given the prior run-up in share prices. The danger is that sentiment gets too bullish.
BofA’s Sell-Side Indicator is at levels historically associated with poorer 12-month returns and is close to triggering a contrarian sell signal. As for analyst buy ratings, investors would surely have preferred if they swelled before the market doubled, instead of after the event.
