Equity Analysts Get Sentiment-al

Earnings estimates have fallen for U.S. firms recently with a slew of downward revisions,¹ possibly indicating that recession fears may be influential. Equity analysts anticipate that U.S. corporate earnings will increase by about 10% this year, which is a sharp departure from last year’s growth spurt (as shown below).

If growth continues to erode, analysts could be faced with trying to identify those firms that can continue to grow despite the difficult environment. They could also be challenged by so-called “growth traps,” which involve companies that were able to grow earnings recently but offered disappointing future guidance.

Earnings and ratings

Earnings estimates and ratings have long been valued financial instruments of the stock picker’s toolkit. Our research indicates that firms whose earnings and ratings have been revised upward (bullish analyst sentiment), tended to outperform the broad market (opens in a new tab). Yet, historically these firms have been rare gems.

We found that certain industry groups, such as telecommunications, real estate and media and entertainment, had a relatively high share of companies where analysts were currently most bullish. To be sure, these industry groups also had a high share of firms that analysts were most bearish on, which may be a ripe opportunity for stock picking.

Small, but mighty?

In addition, we found that most of the companies with the highest (and lowest) sentiment were small-cap stocks, highlighting that analysts may expect the rewards (and risks) in the coming year to expand beyond blue chips.