Corporate earnings and sector analysts are supposed to be good at analysing companies published accounts, but when so much depends on where the economy is going and how the economy is currently, the most important data may be outside company and economic sector returns. That leaves analysts at sea with everyone else and, in any case, there is obviously a lot of room for subjective judgement.The above graphic shows how analysts go with the flow and are either more bullish or more bearish than the underlying reality. We could conclude that analysts are often doing a boring job that only makes sense if they can find more drama in the results one way or the other. Arguably, this is what they are paid for, to shake the trees, or as broker parlance has it, cage-rattling to encourage investors to churn their portfolios.
Every day media continues to voodoo poke at the chicken bones and tea leaves to predict signs of general economic recovering health or persistent illness. Market analysts appear to have zero expertise in identifying, anticipating and responding to economics data. Most stock analysts would have a hard time dissecting employment data, consumer spending data, or understanding even how GDP and GNP are calculated. Its outside their training, world view, or above their pay grade? That opinion is echoed in the FT.
Classic statements by analysts today are along the lines of "Company X or these companies in sector X look pretty good, earnings up OK, plenty of cash or borrowing head-room... But, what if there’s a double dip, Aaaaah?" and then too the usual caveat of "I’m no macroeconomist, but... debt... deficit... trade... what if consumers... non-farm payrolls... Feederal measures... recovery policy run out of steam" i.e. simply reflecting news media talking heads running commentaries. Analysts can have some idea of 'recession-proof' or 'recovery' stocks, but not much.
It is not long since investors were being advised to remain 80% in cash. Markets are volatile as short term profit-takers and Asian day-traders continue to dominate. Hence, the Buy/Sell/Hold opinion-formers remain edgy or cautious.
In the world's bell-weather of US stocks, according to 159,919 buy/sell/hold recommendations compiled by Bloomberg, less than 29% of stock ratings covered by brokerages worldwide are “buys,” (lowest % since at least 1997). Analysts are bearish even as predict 36% higher profits for S&P 500 companies, highest since 1988. Over 54% of company stocks in US, UK, Japan and Brazil are “holds,” (highest % since 1997), while %n of “sell” ratings in the U.S. is down to 5.1%, half the % of 2003, and the total combined with “holds” = a record 71% in August.
Following brokerage analysts is rarely a guaranteed way to make gains. Collectively, the analyst community is excessively bearish, which contrasts with their more typical stance of being excessively bullish.
In macroeconomics, taking the consensus or median view is always a smoothed view. In the microeconomics of stock analysts, the consensus is always likely to be an exaggerated view. In both cases the turning points are never accurate, in large part because analysts are part of the market and can pre-empt changes in perception, but also because there is an inevitable 'camera-shake' in short term forecasts. Markets gyrate naturally by about 1.5% daily in stock markets and that means up to 3% for individual stocks. Like throwing dice or flipping coins stocks can experience several days of rises or falls without that necessarily reflecting actual micro or macro fundamental factors underlying. This does not stop media or analysts always trying to find a logic for every set of price moves - often when there is no actual logic i.e. markets are accident-prone and febrile and inconsistent - notwithstanding all the chartists with their pattern recognition software.
Why should there be so many bearish stock calls from equity analysts these days - is it because the rear-view mirror dominates when the windscreen view is relatively foggy or blank? Fear of a double dip? That's interesting given the lack of past experience in double-dip cycles. Slowing growth? Surely that is not unlike how a freeway/motorway/autobahn congestion gets going, in fits and starts like any clunking chain or food-chain set of effects? There is concern about delayed (postponed) responses to the recession and credit crunch that may overhang recovery such as pent-up joblessness feeding through late to weaken consumer spending, and of course continuing strict credit controls by banks (their excuse for not expanding lending while actually shrinking it!). Uncertainty? What's now about that? Negativity on the economy? In a political election year in the US, nothing new about that either - government is the whipping boy. Credit issues? Why do banks view borrowers as bad credit risk in a recovering economy - actually because they still know themselves to be inconstant debtors. Lack of economic catalyst? Good one; where are the factors for sustained growth - why, in the governments economic recovery spending measures, but these are politically under attack, of course, and the customers of the market analysts reports tend to be fiscal conservatives always prepared to panic about tax and spend.
All we can conclude is that analysts are not outside of the general mess, but part of it, subject to the same subjective prejudices as anyone else - but that's not what we pay them for!
Historically, analysts lag behind events in revising their forecasts to reflect new economic conditions. Analyst forecast error is typically over-bullish — except during downturns, when it is too bearish. Analysts jobs when working for brokers is to encourage buying when the institutions are selling and vice versa - some cynics would say. In my view they are simply subject to the same information pressures as everyone else and have problems seeing the wood for the trees. Hence, as in all else, probably 10% of analysts are geniuses and the rest are dross.
As the graphic above shows, actual earnings from S&P 500 companies only occasionally coincide with the analysts’ forecasts. I expect the analysts' collective performance to be no better in other stock markets round the world, and they get time-scales wrong. As the chart shows, most of the time the analyst community is too bullish by double — they expect earnings growth of 10 to 12%, compared with actual earnings growth of 6%. We should be concerned perhaps that earnings recovery following a recession –like now — has analysts are under-estimating earnings. Lets assume this is because analysts are under-estimating the reluctance or slowness of firms to make new capital investments or build up inventories as they should, but that's only the corporate sector aspect - analysts don't know how, it seems, to look at demand factors in the wider economy.
