Wall Street Is Trying Desperately To Catch Up With Stock Rout
(Bloomberg) -- To see how much pressure the five-month equity selloff is putting on Wall Street, consider the plight of analysts, whose overwhelmingly bullish forecasts are being furiously rolled back.
Researchers who focus on single stocks -- the buy/hold/sell crowd that weighs in when results are disclosed and almost always predicts shares will go up -- are slashing price targets for S&P 500 firms at the fastest pace since the pandemic crash in 2020. Altogether, their projected price level for the index fell 11 weeks in a row, the longest stretch of declines in a decade, data compiled by Bloomberg show.
Those declines paused Tuesday after beaten-down tech stocks bounced back. After falling three straight days, the S&P 500 climbed 0.3% to just above 4,000.
While none of these chronically rosy opinions are particularly meaningful for the market’s outlook, the speed at which they’re being cut does highlight how quickly things have soured for bulls. Corporate America’s earnings power is under threat from supply chain bottlenecks and raging inflation. Meanwhile, the Federal Reserve’s commitment to monetary tightening is putting a ceiling on stock valuations.
“Analysts are under tremendous pressure to keep up,” said Michael Shaoul, chief executive officer of Marketfield Asset Management. “You’re like six months into a different kind of market. Now people are starting to rein in some of those expectations.”
Wall Street price targets reflect best-guesses for stocks that usually do rise, and nothing brings them down faster than a market turn, such as the plunge that has erased more than $9 trillion from the value of equities this year. With the average S&P 500 stock down 24% from its recent high, the carnage has forced many to reconsider their optimism.
Read more: Goldman Sachs and the Rest of Wall Street Are Souring on S&P 500
For those watching sentiment for signs of a market bottom, the spike in analyst downgrades is another lens into the collective psychology that may offer clues on when it’s safe to wade back in.
“It should come as no surprise that these data typically rise during sell-offs, but we look to them as an indicator of the all clear,” said Ryan Grabinski, a strategist at Strategas Securities. “Should the series stop rising, we would view it positively.”
Analysts have made an average 80 price-target reductions per day for S&P 500 firms over the past 20 sessions, the most since May 2020. That’s led to a sharp downgrade in the broad market outlook. Based on aggregate price targets, the projection for the S&P 500 has fallen more than 2% to 5,119.11 since late February, reaching the lowest level since November.
Strategists who take a top-down approach and base their market forecasts on macroeconomic conditions are also busy slashing their numbers. At least three strategists at securities firms have lowered their year-end targets for the S&P 500 during the past month.
Sean Darby, global equity strategist at Jefferies Financial Group Inc., is the latest to revise his forecast. He cut his projection to 4,650 from 5,000 on concern that the Fed’s more aggressive stance on monetary tightening will add additional pressure on equity valuations.
“The battle the Fed now has is with labor compensation and ensuring that a wage spiral doesn’t take hold,” Darby wrote in a note Tuesday. “As neutral rate expectations are reset, market PE multiples are being reappraised.”
Down 16% in 2022, the S&P 500 is off to its worst start of a year in nine decades. The slump drove its price-earnings ratio to a two-year low of 16.9.
“The market is resetting,” said Thomas Martin, senior portfolio manager at GLOBALT Investments in Atlanta. “If we don’t go off the rails and inflation comes down, slowly those targets will stabilize and start to tick back up again as those risk factors abate. But it’ll still be awhile before we get visibility on where the market bottom is.”
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