S&P 500 Rally Shows Analysts Slow or Investors Sanguine
The advance that pushed the Standard & Poor’s 500 Index (SPX) to a record left companies trading closer to analyst price estimates than any time in at least seven years.
Shares in the index are 5 percent away from analysts’ mean forecasts after the benchmark gauge rallied 10 percent in the first quarter, according to data compiled by Bloomberg starting in 2006. That’s the smallest difference ever for the median stock and compares with the historical average of 14 percent.
Bulls say the narrowing spread shows securities firms were caught off guard by the rally and that equities will climb as they boost predictions. Bears say the slowness of analysts to respond means stocks have gotten so far ahead of themselves that even market optimists are uncomfortable with the increase, which has added more than $10 trillion to values since 2009.
“The market has moved so fast, it hasn’t given the analysts time to re-evaluate things,” Malcolm Polley, who manages $1.1 billion as chief investment officer at Stewart Capital Advisors LLC in Indiana, Pennsylvania, said in a March 26 phone interview. “As we just finished earnings season and we’re winding down the first quarter, analysts will begin the process of reassessing. My sense is we’re looking for better economic and corporate things than we’re seeing today.”
The S&P 500 rose 0.8 percent to 1,569.19 last week, passing the previous all-time high of 1,565.15 from October 2007, after better-than-estimated durable goods orders and the biggest increase in home prices in almost seven years. Stocks have gained 10 percent in 2013, compared with increases of 4 percent in the dollar, 0.6 percent in commodities and 0.6 percent gain in global bonds, according to data compiled by Bloomberg. The S&P 500 fell 0.5 percent to 1,562.17 today.
Stocks from Western Digital Corp. (WDC) to PG&E Corp. are closing in on average forecasts, derived by taking the mean of all price estimates for individual companies among securities firms tracked by Bloomberg. A total of 401 are trading either within the historic average of 14 percent or above price estimates, projections show. Should every one of them reach the predicted level, the S&P 500 would surpass 1,680, according to market- weighted data.
Archer-Daniels-Midland Co. (ADM) and Mattel Inc. are among 134 companies that have already surpassed the average projection, the most since at least 2006. The last time there were more than 100 companies trading above targets was in 2009, when the S&P 500 rose 24 percent. On average, companies that climbed above analyst forecasts since 2006 rose another 9.6 percent in the next 12 months, twice as much as the rest of the market, data compiled by Bloomberg show.
“The market has gotten it right and analysts have been a bit tardy,” Johannes Jooste, who helps oversee more than $1.76 trillion in client assets at Merrill Lynch Wealth Management in London, said in an interview on March 27. “Their fear of systemic risk is still excessive.”
Concern Europe’s debt crisis is reviving has sent American equities to their biggest single-day decline in 2013. The S&P 500 slumped 1.8 percent on Feb. 25 after Italian elections produced inconclusive results. It dropped 0.6 percent on March 18 after European leaders imposed a tax on Cyprus bank deposits as part of a bailout agreement.
Spreads between stocks and price projections have narrowed as analysts cut forecasts for S&P 500 earnings. They predict profits among companies in the benchmark gauge will fall 1.8 percent in the first quarter from a year earlier, compared with estimates for a 1.2 percent gain at the start of the year. Five companies issued earnings forecasts below analyst estimates last month for each that predicted results above the average projection, data compiled by Bloomberg show.
“The fundamentals are not necessarily dramatically better and therefore you may be paying a pretty full price” for stocks, Bruce McCain, who helps oversee more than $20 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland, said in a March 27 phone interview. “The analysts have less to go on.”
Shares have surged 132 percent since March 9, 2009, the biggest bull market since the eight-year advance in which the benchmark index added 302 percent through 1998. They have skirted bear markets twice, falling 16 percent over two months in 2010 and 19 percent between May and October of 2011.
“A lot of people felt like we were going to muddle through the first half, so when they set their targets, that’s what they had in mind,” Walter Todd, who oversees about $940 million as chief investment officer of Greenwood Capital Associates LLC in Greenwood, South Carolina, said in a March 28 telephone interview. “The consequence of that is we’re getting to these targets set for the year much quicker.”
The spread between analyst forecasts and stock prices is less than half what it was when the S&P 500 last peaked in October 2007. Average estimates for individual equities implied gains of 12 percent at the time, data compiled by Bloomberg show.
The Dow Jones Industrial Average (INDU) exceeded its record on March 5, erasing losses from the financial crisis, and has advanced 2.3 percent since then on signs the U.S. housing and job markets are recovering. Home prices increased the most since June 2006 in January, a report last month showed. First-time jobless claims unexpectedly fell the week ended March 9.
“The move we’ve had so far does not mean it cannot continue,” Warren Koontz, head of U.S. large-cap value stocks at Loomis Sayles & Co. in Boston, said in a March 26 phone interview. His firm manages about $185 billion. “When we see this dislocation between a near-term analyst opinion and what we believe is longer-term and better potential that’s already being reflected in the price, we look at that as an opportunity.”
Archer-Daniels, the world’s largest corn processor, has rallied 23 percent to $33.73 in 2013, after posting quarterly earnings and revenue that topped analysts’ estimates. While the stock posted its best quarterly gain since 2010 and has reached an almost two-year high, analysts haven’t raised their price target at the same pace. The average estimate of $32.38 is lower than the stock price last week.
Shares of Mattel have surged 20 percent in 2013, almost four times as fast as analysts pushed up estimates. At $43.77, the stock is trading above the $43.27 projection. Analysts estimated Western Digital was 21 percent underpriced throughout 2012, according to the average of their target prices compiled by Bloomberg. That spread narrowed to 1 percent last week after the maker of hard drives based in Irvine, California gained 18 percent in 2013 to $50.29.
While analysts raised their price projection for PG&E (PCG) by 1.6 percent since February, it wasn’t enough to keep up with the stock. The owner of California’s largest utility advanced 11 percent in 2013, pushing the price to $44.53, less than 1 percent below analysts’ target of $44.93, data compiled by Bloomberg show.
“Many analysts and strategists have been skeptical of the market’s advance and staying power, they know we are in record territory and they don’t want to appear overly positive like many did in 2000 and 2007,” said Howard Ward, chief investment officer at Rye, New York-based Gamco Investors Inc., which oversees $36.7 billion. “I would view analyst skepticism, to the extent it exists, as a contrary indicator for the market.”
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