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Stocks have rallied this year, and Wall Street’s forecasts have followed the market higher.
As Yahoo Finance’s Josh Schafer has chronicled in recent weeks, strategists from several firms have revised higher their 2023 price targets for the S&P 500 as the index gained over 15% in the first half of the year.
Last week, Fundstrat’s Tom Lee put a new Street high price target on the index, forecasting the S&P 500 to rise from its current level of around 4,400 to 4,825 by year-end. Previously, Lee had expected the index to finish 2023 at 4,750.
And while most discussion about expectations for the index is centered on what “top-down” strategists think will happen for S&P 500 companies in the aggregate, analysts covering individual stocks have been steadily growing more bullish on prospects for the index over the last few months.
Late last week, the team at FactSet looked at “bottom-up” estimates for the S&P 500 — which aggregates analyst price targets for companies in the index — and found industry analysts see the index reaching 4,823 over the next 12 months, good for a gain of around 9%.
And if we look at the following chart from FactSet, we can see a few key inflection points for investors this year.
Starting in late January and running through late February, “bottom-up” expectations for the S&P 500 rose as first quarter earnings were better than feared.
Then, in late April, several big tech firms reported earnings that beat expectations. In late May, Nvidia (NVDA) reported one of the biggest guidance raises you’re likely to ever see from a company of its size.
Now to some, this optimism from company analysts will come as no surprise.
Work from FactSet last year found that 57% of analyst ratings on stocks were a Buy or equivalent rating; only 6% of ratings on all stocks in the S&P 500 were a Sell or equivalent.
And as Bloomberg’s Matt Levine wrote many years ago, much of the value Wall Street analysts provide is in ensuring their clients can get some level of access to company management teams.
Analysts also offer clients a ready-made financial model for a company they can later tweak themselves — and potentially an industry expert ready to answer questions from a more generalist investor at, say, a hedge fund who wants to learn about the chemicals business.
In other words, whether Wall Street analysts actually recommend which stocks go up and by how much is not quite the job. And so the net outcome is that most stocks have a good rating because the job of an analyst is to maintain a rapport with management teams.
If company analysts are ridiculed for being too deferential to the companies they cover, then strategists are often criticized for simply following the market higher or lower.
Yet, as we wrote last month, the latter take is a bit too harshly simplistic. And particularly so when looking at how analysts have changed their collective tune in recent months.
Stocks have been rallying as earnings expectations have gone higher. Over the long run, earnings power stock returns.
And as is true on Wall Street and in life, the biggest disconnect between strategists, analysts, and stock prices this year has been timing. But it seems folks may be closer to synching up their schedules.
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