It’s been two decades since Wall Street analysts were so optimistic.
About 56% of all S&P 500 firm recommendations are listed as purchases, the most since 2002. It is yet another piece of data that shows the extent of the euphoria sweeping the markets after a highly successful earnings season.
While analysts are historically a bullish bunch, they are becoming even more optimistic in the face of relentless stock market gains and corporate earnings that beat even the highest expectations. Despite all the concerns about the delta variant, China’s regulatory crackdown, or waning stimulus from the Federal Reserve, it hasn’t hit share prices much yet.
“It’s not just financial conditions and low rates that fuel the appetite for risky assets; a tremendous fundamental improvement is forecast in 2022,” Todd Jablonski, chief investment officer at Principal Global Asset Allocation, said in a note.
American companies aren’t the only ones feeling love. In Europe, about 52% of recommendations on Stoxx 600 companies are for purchase or equivalent, a maximum of 10 years. In Asia, that number rises to 75%, the highest proportion since at least 2010.
The second-quarter earnings season was one of the strongest in history, even when compared to the period last year when many parts of the world were under pandemic control. US earnings growth of 90% was 17 percentage points better than expected, while a 71% increase in Europe came as a 16 percentage point surprise, according to JPMorgan Chase & Co.
In both regions, results were stronger than the acceleration of growth momentum over the period implies, JPMorgan strategists said in a note.
While some of that earnings optimism has been reflected in the markets, analysts see room for further gains. Converting 12-month aggregate price targets for Stoxx 600 members implies an increase of around 9% for the index from current levels, while for the S&P 500 the implied gain is around 10% and for Asia 21%.
For Ben Laidler, global markets strategist at Etoro Ltd., the reopening “has not yet begun.” For companies like restaurants, tour operators, airlines and hotels, profits are still below 85% from where they were entering this crisis, he said on Bloomberg TV, leaving clear scope for a rebound.
Luc Aben, chief economist at Kempen & Co., has a positive view of value stocks. “These are overrepresented in sectors that were severely affected by the coronavirus pandemic,” he said in a note. “If the recovery persists, the style rotation could resume.”
However, this bullish sentiment does not come without a touch of exuberance and it would not be the first time that investors have fallen on the wrong foot.
“I think the market is moving in any direction that hurts the majority of participants,” said Dave Lutz, ETF director at JonesTrading Annapolis. “If all the analysts on the street are optimistic, I would be very cautious,” he said in a note.
However, at this time, the markets are not in the mood for a correction. The last time the S&P 500 Index saw a dip from a high to low of 5% or more was 193 days ago, about twice the long-term average.
“There is a lot of purchasing power from the margin decline and any correction that may be justified could also be short-lived,” Salm-Salm & Partner portfolio manager Frederik Hildner said by phone.
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