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Bloomberg

Captive short strategists are a stealth stock market accelerator

(Bloomberg) – With bond yields rising and inflation expectations rising, this seems like an odd time for optimism among Wall Street stock handicappers. But that’s exactly what it did. And the reasons provide a glimpse into the worst three-day decline in stock markets since October that didn’t get out of hand this week. It was hard to tell, but while the markets tumbled, the equity strategists of the investment firms were busy increasing their earnings estimates for S&P 500 companies. This brought the earnings projections of these top-down forecasters in line with a much larger number of corporate analysts, the single stock researchers, who track individual companies. While no one believes the published opinions of strategists are of particular importance to the daily movement in stock prices, the phenomenon is showing momentum that has supported stocks for more than a year. That is, the slow and almost invisible improvement in corporate earnings that comes with growing inflation fears and blotchy data – and continues to stall the sell-off: “In a very strong economy, it will be difficult to make a deep correction and earnings revisions that are still moving rapidly “Said Keith Lerner, Chief Marketing Strategist at Truist Advisory Services. “It’s just a pullback pad, and that’s exactly what we saw this week.” Dennis Debusschere, Head of Portfolio Strategy at Evercore ISI, was one of the strategists who raised earnings estimates in the face of a share price sparked by fears of inflation. Citing an unexpectedly quick recovery in corporate activity, he raised his 2021 forecast for S&P 500 companies by $ 6 to $ 182 per share. “Inflation tends to be higher and supply chain disruptions are a potential threat to profitability, but management sentiment on margins has continued to climb,” he wrote in a note to customers earlier this week. “Until that trend is reversed, strong sales growth and strong pricing power support,” he said. Wall Street has slowly but firmly resigned itself to the resilience of American corporations. Profits, which did not fall as much as feared during the initial pandemic lockdowns, are now recovering faster than expected. The net result: earnings recovery expected to take years to come by June, a span of just five quarters. When this reporting season began five weeks ago, analysts’ earnings estimate for 2021 for S&P 500 companies was $ 174 per share. After nearly every company beat expectations, expected income rose 5.7% to $ 183.90 per share. This was the second-fastest upgrade pace since Bloomberg began tracking the data in 2012, only surpassing it in the 2018 cycle in response to President Donald Trump’s tax The evolution of top-down strategists showed a similar pattern: forecast earnings rose roughly 4% to $ 185 per share last month. But this is where the consensus ends. When it comes to where the market is going, the two groups of forecasters couldn’t be further apart. With the S&P 500 nearly doubling in 14 months, the strategists tracked by Bloomberg urge customers to be careful. Even after a series of upgrades, the 2021 average target price is 4,199, within 0.1% of the index closing on Friday. In other words, they see little room for upward movement. On the flip side, bottom-up researchers who focus on individual stocks – the buy / hold / sell amount that weighs in when the results are announced – are far more optimistic. Based on the aggregated price targets, they say the S&P 500 needs to run an additional 11% from here. That divergence is the second largest in Bloomberg’s 2004 data at this time of year. Who would believe this? Neither side has a monopoly on wisdom – there is little record of anyone being consistently right about stocks. Marc Odo, client portfolio manager at Swan Global Investments, stands by the strategists’ side, noting that analysts may be too fixated on the microside of some strategists, including Morgan Stanley’s Mike Wilson, have warned against seeing the latest robust results on extrapolate the quarters ahead as supply and labor shortages are likely to affect profits. Others, like Bank of America’s Savita Subramanian, cited stretched valuations and impending headwinds such as tax hikes and central banks turning back monetary stimulus as reasons to be cautious. “When you get a large cross-section of analysts, they’re all going to be bullish in their specific niche and that creates a bullish consensus,” Odo said. “As someone approaches from top to bottom like the strategists, they look more at the forest and may be able to spot these weak spots.” For Truist’s learner, strategists may be forced to catch up should the market persist and march higher. “The strategists are much slower because they look at macro trends,” he said. “You will either be stuck with your point of view and say the price is already fixed, or you will see it more with a delay.” For more articles like this please visit us at bloomberg.com business news source. © 2021 Bloomberg LP