Traders work the floor of the New York Stock Exchange on Nov. 28, 2014.Brendan McDermid/Reuters
Sell-side analysts do not have great expectations for the performance of U.S. equities over the next year.
According to Pavilion Global Markets, the bottom-up consensus call is for the average stock in the S&P 500 to gain 8.7 per cent during the next 12 months. This is an improvement from late February, where projected appreciation was a little more than 6 per cent, but still near the low end of the range for the past decade.
On a sectoral basis, Industrials, Materials, and Telecommunications Services are expected to enjoy double-digit advances; Energy stocks are projected to rise by just 5.1 per cent, according to analysts.
Sell-side price target alterations are typically more reactive than proactive – after a large move in the stock, analysts will scramble to adjust their price target accordingly.
The inherent bias is also well-known: for more than a decade, the consensus has never called for the S&P 500 to decline year-over-year, even at the height of the financial crisis.
However, that doesn't mean trends in analysts' target prices don't contain useful information for investors.
Pavilion found that, within the S&P 500, the quintile of stocks that have received the largest upward revisions to their price targets has outperformed the equal-weighted index by a substantial margin.
Strategists Pierre Lapointe, Alex Bellefleur, and Francois Boutin-Dufresne believe that analysts are at a "crossroad"; for the benchmark U.S. index to move higher, the sell-side will likely have to boost their price targets.
"Currently, return expectations are very low, which is unlikely to convince investors to add more to U.S. equities," they wrote. "We expect analysts to go back to their drawing boards and raise their targets. This would support equities."
The downward revisions to earnings per share estimates, largely due to tumbling energy prices and the lofty U.S. dollar, have received much attention. Thus far, however, the reductions to profit estimates are actually below the average level for the past 30 years – though the year is still young. Meanwhile, analysts are still generally hiking price targets on S&P 500-listed companies.
An acceleration in price target increases – fostered by better than anticipated earnings – could be the impetus for the next leg higher in the U.S. equity market.
Pavilion "would not be surprised to see a slew of upward target price revisions in the coming weeks."