Wall Street Is As Bullish As It’s Been in Almost Twenty Years

Stock market analysts are known to often be an overly optimistic bunch. And in the face of a new Covid wave, China’s swift regulatory crackdown, and deteriorating political stability in the Middle East, they’re feeling… as optimistic as ever?

Right now, 56% of analyst recommendations on S&P 500 stocks are buys, the most since 2002 and an indication that a strong earnings season has given Wall Street an unbridled swagger. Not everyone is buying all the bravado, though.

Rose-Tinted Balance Sheets

The second quarter accounted for one of the best earnings seasons in history. U.S. companies posted profit growth of 90% (17% above expectations), and European firms grew profits 71%, beating expectations by 16%. Even with stock prices at all-time highs — leading some to argue the optimism of the moment is already priced in — there are indications that more gains are possible:

• Aggregated 12-month price targets for the S&P 500 suggest a further implied gain of 10%. For Asian stocks, that figure is even higher at 21%. And in Europe, Stoxx 600 companies have an implied gain of about 9% for the next 12 months. (In Europe and Asia, buy recommendations are at 52% and 75% respectively, each 10-year highs.)
• Markets don’t seem keen on a correction (a decline of 5% or more). It’s been 193 days since the last one, twice the typical duration between corrections, and many restaurants, airlines, and tour operators are still reporting earnings 75% or more below pre-crisis levels, leaving ample room for a further rebound.

Red Flags: Not all indicators are rosy. As of August 9th, the ratio of S&P 500 company share prices to earnings per share was a towering 38.5. That’s more than double the historic average of 16.8. The previous four times the ratio broke above 30, the S&P subsequently fell at least 20%. “If all the analysts on the Street are bullish, I’d be very cautious,” Dave Lutz, head of ETFs at JonesTrading Annapolis, warned in an investor note.