US stock market is showing some strength after a long weekend. However, S&P 500 is still in bear market territory down by over 20 per cent from the recent highs. Currently, at around 3,674.84 level, the S&P 500 is lower by nearly 22.90 per cent since January 2022.
It’s been another tough week in financial markets. The S&P 500 closed lower by more than 5% for the second consecutive week. The last time this occurred was in of March 2020. Prior to that, the last time it happened was during the GFC when it actually happened twice once in Oct. and again in November of 2008. Three data points aren’t statistically significant, but for the record the returns in the week that followed in chronological order were up 4%, 12% and 10%, respectively, wote Michael Reinking, CFA Sr. Market Strategist in a recent note.
As per FactSet, despite higher inflation, rising interest rates, military conflict in Ukraine, fear of recession, and stock price declines, analysts continue to have an unusually high number of Buy ratings on stocks in the S&P 500.
What is driving the optimistic outlook in terms of ratings? One possible reason is that analysts have continued to increase earnings estimates for S&P 500 companies in aggregate for CY 2022 and CY 2023 in recent months.
As of today, there are 10,708 ratings on stocks in the S&P 500. Of these ratings, 56.9% are Buy ratings, 37.7% are Hold ratings, and 5.4% are Sell ratings.
The 5-year average (month-end) percentage of Buy ratings is 53.3%, the 5-year average (month-end) percentage of Hold ratings is 40.7%, and the 5-year average (month-end) percentage of Sell ratings is 5.5%.
The percentage of Buy ratings has declined slightly in recent months from a peak of 57.4% at the end of February to 56.9% today. However, assuming the percentage of
Buy ratings does not dip below 56% in the next two weeks, the month of June will mark the 15th straight month in which the percentage of Buy ratings on S&P 500 stocks finishes above 56%.
Prior to this recent surge in Buy ratings, the last time the (month-end) percentage of Buy ratings exceeded 55% was September 2011 (55.8%).
At the sector level, analysts are most optimistic on the Information Technology (65%), Energy (64%), and Communication Services (61%) sectors, as these three sectors have the highest percentages of Buy ratings.
On the other hand, analysts are most pessimistic on the Consumer Staples (39%) sector, as this sector has the lowest percentages of Buy ratings. The Consumer Staples sector also has the highest percentage of Hold ratings (49%) and the highest percentage of Sell ratings (12%).
Highest % of Buy Ratings in S&P 500: Top 10 (Source: FactSet)