‘Boy these companies look pretty good, earnings are OK, they have plenty of cash. What if there’s a double dip?’

‘I’m no macroeconomist, but . . .’


Here is an intriguing possibility, one that should make any investor holding 80% cash a tad nervous: The Buy/Sell/Hold crowd of analysts are excessively cautious:

“For the first time since at least 1997, fewer than 29 percent of ratings for stocks covered by brokerages worldwide are “buys,” according to 159,919 recommendations compiled by Bloomberg. Analysts are turning more pessimistic even as they push up estimates for profit growth among Standard & Poor’s 500 Index companies to 36 percent, the highest since 1988. . .

More than 54 percent of ratings for companies in the U.S., U.K., Japan and Brazil are “holds,” the highest level since Bloomberg began tracking the data in 1997. While the proportion of “sell” ratings in the U.S. has fallen to 5.1 percent, half the level of 2003, the total combined with “holds” reached a record 71 percent last month, the data show.”

As we have noted so many times previously, following the Wall Street crowd of analysts is rarely the way to make money.

Collectively, the analyst community has turned excessively bearish, versus their typical excessively bullish outlooks.

Why so many bearish stock calls from equity analysts? Fear of a double dip. Slowing growth. Concern that joblessness will weaken consumer spending. Uncertainty. Negativity on the economy. Credit issues. Lack of economic catalyst.

In other words, all of the general economic concerns trumpeted in the media each day — that these analysts have precisely zero expertise in identifying, anticipating and responding to. In fact, most stock analysts would have a hard time dissecting BLS employment data or understanding how GDP is calculated. Its outside of their roundhouse.

Historically, analysts typically “lag behind events in revising their forecasts to reflect new economic conditions.” A McKinsey study found that analyst forecast error is too bullish — except during downturns, when it is too bearish.  Actual earnings from S&P 500 companies “only  occasionally coincide with the analysts’ forecasts.”

As the chart below shows, most of the time the analyst community is too bullish by double — they expect earnings growth of 10 to 12%, compared with actual earnings growth of 6%.

However, the earnings recovery following a recession –like now — has analysts under-estimating earnings.


Bullish and Bearish at the Exact Wrong Times

click for larger graph


Ultimately, excess pessimism amongst the analyst crowd may be a bullish contrary signal. It should make dedicated bears nervous . . .


McKinsey: Equity Analysts Are Still Too Bullish (June 2nd, 2010)

Sell Signal on 36% Profit Gain Has Analysts in Denial
Rita Nazareth and Lynn Thomasson
Bloomberg, Aug. 30, 2010 

Category: Analysts, Contrary Indicators, Corporate Management, Earnings

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

40 Responses to “Are Wall Street Analysts Contrary Indicators?”

  1. Investors Pull $7.1 Billion From Stock Funds Globally

    Investors withdrew a net $7.1 billion from equity funds tracked worldwide in the week to Aug. 25 and put some $5.2 billion into bonds amid concern economies in the U.S. and Europe are losing momentum, EPFR Global said.

    A net $5.4 billion was redeemed from U.S. stock funds, while inflows into emerging markets were the lowest in 13 weeks, EPFR said in an e-mailed statement. Developing-nation bond funds took in $1 billion, on course for a record-setting year, while U.S. bond funds drew $2.5 billion, according to the Cambridge, Massachusetts-based research firm.

    The MSCI AC World Index, tracking developed and emerging markets, has dropped 4.2 percent this month after government data signaled a slowdown in the U.S., China and Japan and Standard & Poor’s lowered Ireland’s credit rating. Concern the global rebound will falter is driving investors to the relative safety of bonds, sending yields on two-year treasuries and German 30-year government securities to a record low this week.

    Are analysts leading or following this trend?

  2. “It should make dedicated bears nervous . . .”–BR, above


    here, again, you show that, on this Field of Pursuit, you are in need of no Cane.

    differently, I think you’re Correct about hesitating on siding with the ‘Wouldn’t know Preferred Stock, from Livestock’-Crowd..
    also, it seems that one can’t a page w/o hitting: ~”Retail bails from Stocks; Equity MutFunds see net Flows at near record negatives..”-Stories..
    LSS: lots of room to the upside, We could get back to SPX ~1120, in a hurry..

  3. Marcus says:

    Great chart. 2005 and 2006 were the two years when analysts were too pessimistic, years when emerging markets like China were soaring, years when markets were recovering from the Dot Bomb. It looks like a buying opportunity at the moment.

  4. dead hobo says:

    So, who is going to start buying and why? Oh, I forgot, the contrary indicators don’t worry about such things. Contrary indicators only exist as entrails and only those who clearly understand the ways of voodoo can read them.

    When I started reading about behavioral finance I used to believe that crap. People ran in herds and the herd was always wrong at turning points. Rather, this is only true in times of economic frenzy and asset bubbles. Greed triumphs over common sense in markets that are pumping higher and higher without apparent end. That is not happening today without fuel for the HFT pumps and I’m not sure it would happen a 2nd time if the Fed bought the stock market again. People just aren’t that stupid right after the bubble bursts.

  5. dead hobo says:

    Correction to above: The Fed IS that stupid and may try it again in order to stimulate consumption. The pump would essentially be a transfer payment from the Fed to Wall street and buyers who sold at the top.

    The main beneficiaries would be funded 2010 Wall Street bonuses. And, as I said, the Fed IS that stupid and may spend another trillion to buy the stock market just like last year. Just remember to sell at the top if they do (just after the last injection has been made) and DO NOT start buying until it looks like the run up has been firmly established. In spite of the prevalence of magical thinking in this space, history almost never repeats itself.

  6. JasRas says:

    Think I’ll pass on this one… I want the curve that looks like 2003 and 2004… I remember people being bearish and scared while analysts were adjusting earnings upwards. Now that was a great indication… This looks a bit more like 2001, 2002, and 2007– and it probably served most well to respect the analyst’s revisions then. In fact, I remember people getting frustrated b/c of the downward revisions on these “great stocks”… hmmm. People were in love with their stocks–and I still hear that from a lot of fundie guys right now…

  7. chartist says:

    The charts have to improve….I believe wall street figures things out way before analysts….So, I’ll keep my eyes on the charts.

  8. tawm says:

    The single largest factor which will put an upward push to equity prices is the debasement of the US dollar. As the government prints and prints and prints (calling it “stimulus” or whatever), at some point most prices will rise. Maybe my view is over-simplistic, but history would indicate this will happen.

  9. on the flip side, to JasRas’ point, longer-run, we have this:


    “…sees deepening economic trouble ahead, no matter what steps the administration, Congress or the Fed undertake. He expects little more stimulus, just another futile central bank attempt to print money (lots of it) to buy time. “These paper dollars will not create real prosperity,” just an illusory, “temporary, false prosperity,” but none at all for most people, hung out to dry on their own.

    He also expects a sovereign debt crisis to hammer Europe and the US, saying America’s plight exceeds the dire situation of PIIGS countries (Portugal, Italy, Ireland, Greece and Spain), citing the Bank of International Settlements (the central bank of central bankers) saying US debt will hit 400% of GDP, more than triple Greece’s burden at 129% that plunged the country into (undeclared) bankruptcy. Indeed the worst for America is yet…”

    and, “…America Is Already Bankrupt

    Boston University Economics Professor Laurence Kotlikoff explains it in his August 10 article, titled “US Is Bankrupt and We Don’t Even Know It,” saying:

    “Let’s get real. The US is bankrupt. Neither spending more nor taxing less will help the country pay its bills.” What’s needed, he says, is reengineering the economy by “radically simplify(ing) its tax, healthcare, retirement and financial systems….” Revitalization depends on it with unfunded liabilities topping $110 trillion and growing. Even the IMF is worried, saying “closing (America’s) fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of US GDP,” meaning, of course, from working households, not corporate interests or national security, the most glaring areas needing reform…”

    the *Real Q: is whether, or not, We’re going to remain Supine when the IMF, and their ‘friends’, come and tell us, “Disaster Capitalism”-Style: “…Current federal revenue totals $14.9% of GDP, the IMF saying that closing it requires “an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.”

    Such policy would produce a 5% surplus this year, the IMF prescribing ad infinitum fiscal austerity, saying delay will make it tougher ahead. “Is the IMF bonkers?” Not at all, just preferential, wanting workers, not special interests hit hardest, the way it’s raped and mauled economies for years, serving capital, not people, now aiming at America, the biggest plum of all ripe for plucking with millions of vulnerable households, easy pickings for the powerful, harming, not relieving their needs by:

    – cutting wages and benefits;

    – destroying, not creating jobs; privatizing everything for private gain; and
    – turning America into Guatemala, a corporatist’s dream…”

    some things, just, might be, after all, more important than scalping blips from dancing figures on the screen..

  10. Greg0658 says:

    from a policy point of view .. not a make money point of view … I’m perplexed …

    on one hand going into BONDS after building up the corporations and being flush with cash allows them the ability to buy back their companies on the cheap and go into the private column with the manufacturing base

    on the other hand staying in STOCKS gives them more firepower to buy up smaller fish increasing their influence in the sea and the whole TBTF scenario .. and a signal from the market that we are still with your actions ie: ceo pay, outsourcing, off booking reality

    on one hand going into BONDS would have been (before the buildup) the answer . imo .. remove the gas from what I think has happened .. would have allowed everyone in the dollar market to share the wealth .. the corporate stocks structure allows a separationist strategy ….

    maybe thats the world we want .. corporate flags .. and a world army paid for by the red white & blue one

    ps (before submit) – our red white & blue army is returning with what? peace? security? new world order?

  11. wally says:

    “Why so many bearish stock calls from equity analysts?”

    Herd mentality. It is quite fashionable to be bearish now. Besides, most analysts forecast yesterday, not tomorrow.

  12. Remember — it is 1st & formost, it is always an issue of price.

    The question is NOT is this recovery mediocre, is growth slowing. Let’s stipulate it is.

    The more important question is: “Have prices, relative to earnings, reflected that? Are stocks over oe under-valued?”

    I don’t know. But when the wrong way groupthinking herd of analysts are bearish, it makes me rethink my big cash positions.

  13. lagresti says:

    29% buys + 54% holds +5% sells = 88%?


    BR: There are “No opinions”, “Reduce”, Short, etc.

  14. adbutler007 says:

    Hey Barry,

    I read the same article and came away with these facts:

    1. Analysts are raising earnings guidance
    2. There is a record DEARTH of SELL recommendations, with the percentage of SELLs at 1/2 the level of 2003.

    I know that a sell-side HOLD should often be interpreted as a sell, but the chart you posted was of analyst EARNINGS revisions, not buy/sell/hold ratios. Analysts consistently lag the earnings series, but I haven’t seen any research on BUY/SELL/HOLD ratios as a contrary indicator.

    It seems on this basis that analyst earnings optimism may be telling a different contrary story. Thoughts?

  15. VennData says:

    Does the fact that in the free-market the analysts calls, etc… are free mean anything?

    What about their historical returns? It shouldn’t be too hard to measure. Why not give them all a web site where their calls are tracked in real time? I wonder why they don’t do that?

    And another thing, do they keep their age in bonds? 25%?

  16. constantnormal says:

    Perhaps not contrary indicators, but their purpose is not to enrich the customers, it is to sell stuff to them … as such, a Wall Street analyst should be viewed in the same light as any other salesman, with suspicion and caution.

    All of Wall Street analysts presentations are oriented toward getting the customer to make some commission-generating activity, never with the welfare of the customer at heart.

  17. nihoncassandra says:

    BR –
    While it is possible, I am skeptical. If memory serves me correctly, academic research on the BOTTOM UP analysts estimating individual securities out-of-sample indeed shows the negative slopes of forecasts systematically dropping before converging on the actuals (excepting 03 -6), showing systematic excessive optimism from the bottom up guys. However, the same curve constructed of aggregate estimates from the TOP DOWN Strategists displayed excessive pessimism as these out-of-sample aggregate estimates plateaued or climbed to convergence from systematic points of underestimation. That is my memory.

    One explanation of this (and perhaps the underestimation of 03-06) is as Occam might suggest, the fact that the majority of bottom up guys (like Blodget & Meeker) are (or at least were) deeply conflicted, and if not outright disingenuously optimistic, they were at least loathe to be pessimistic in regards to their actual or potential banking, advisory, or underwriting clients, or for that matter, writing non-Pan-Glossian pieces that might jeopardize their access to management. Needless to say, Strategists are not similarly encumbered. Importantly, it is quite possible that 03 to 06 was anomalous – not in that it was a “recovery”, (or lets call it what it was “A Borrowing of Growth From The Future”), but because Bottom-Up Analysts and their firms got caned as the most egregious of Jack Grubman-like disinformation for Bernie Ebbers, Nacchio & friends were, if not rooted-out, forced to tone down to give at least a reasonable semblance of fairness – if only for a while. Indeed with regulators still turning a blind eye, The Game continued with many of the endemic conflicts subdued for just long enough for their interlocutors to lose interest. Reliable bottom-up estimates just doesn’t go back long enough, and there just aren’t enough recession data points during the life of this body of data to build the case for bottom-up aggregate estimates being a systematic contrary indicator. Just my two-cents….

  18. Michael M says:

    Maybe something changed. Maybe analysts were catering more to long-only retail investors and mutual funds before, but are now more focused on hedge fund clients and therefore have less of a need to be eternally bullish.

    Or maybe analysts are bearish because they see deteriorating earnings quality beneath the headline beats i.e. they think companies will make their numbers, but they also read the footnotes.

    Recommended reading regarding ‘beating the numba’:


  19. [...] However, his comments about imports, profits and valuation are opposite to what Wall Street analysts are saying. [...]

  20. constantnormal says:

    What the bears should be most wary of is that — for whatever reason, government “persuasion”, tax law changes, stockholder revolt — these companies with huge cash positions start issuing dividends.

  21. rktbrkr says:

    The Fed is not stupid, they don’t have limitless resources and they will always support their bretheren at the 19 TBTF forst and foremost, then it’s trickle down economics at work for main street. If RE really sours again things will get really bad for the big mort lenders and thats where the fed will direct their remaining efforts.

    If Wall street looks 9 months ahead maybe the 1Q of 2011 will be the start of the first or second recover depending whether this is technically still one recession anr a double dipping

  22. Dow says:

    Why buy anything Wall Street is selling? That’s not a bear vs bull argument – it’s just a simple statement of fact that what you see is not what you get.

  23. constantnormal says:

    Do equity markets behave “normally” when interest rates have been pushed down to near-zero, with the only safe bet on what the goobermint will do about the flagging economy (housing, unemployment) is that it will keep rates near-zero for as far into the future as the eye can see?

    It strikes me that past rules of thumb are pretty much worthless now.

  24. Efficientish says:

    I did a post last night; I am starting to get more constructive on the market:


  25. Greg0658 says:

    missed a couple nuances ..

    selling stocks pressures a struggling corp to get cash .. opening a takeover

    the correct bonds are liquid at the principle invested
    the wrong stocks are not liquid

  26. rootless cosmopolitan says:

    Barry says:

    Collectively, the analyst community has turned excessively bearish, versus their typical excessively bullish outlooks.

    Define “excessively” and do you have some data to back up your claim?

    The Investors Intelligence Survey says following for August 24: 33% bulls, 31.2% bears.

    So, where can this alleged excessive bearishness be seen in the data? If it can’t it’s just your own, totally subjective perception. And then the question rather should be, why do you want to see the analyst community as being excessively bearish, even if it isn’t?

  27. DL says:

    I may do some buying in October. But not now.

  28. Bokolis says:

    Does the current prevalence of negative sentiment owe to it no longer being considered blasphemy? The assumption that the herd is wrong is hardly cause to back up the truck. In the late ’90s, the Greenspan Put was the stop-valve that ensured one-way traffic. As then, the question is, what are they missing? Is there some factor coming (the next big thing/scam) that clears up the mirage that the credit party is over and the taco stand will trudge along accordingly for the next 10 years?

    If y’all figure it out before it happens, let us in on it.

  29. Mike C says:

    Here is an intriguing possibility, one that should make any investor holding 80% cash a tad nervous:

    So I’ll repeat my question from the previous sentiment post. Are you increasing long exposure here due to the sentiment readings or do other considerations such as valuation, technicals, and seasonals (Sep-Oct) still warrant a high cash position?

  30. jopo says:

    game is up…no one buys into the wall street shill/3 card monte scam anymore…these joke blokes may actually have to earn their money for once and call it like they see it…instead of someone telling them how to see it. with equity volumes down, they’re scared for their jobs just like anyone else. not only have the current generation of stock market participants been demoralized, but the new generation sees through shenanigans and wouldn’t touch equities with a 10 foot pole.

  31. [...] following the Wall Street crowd of analysts is rarely the way to make money,” Barry Ritholtz writes at The Big Picture. “Ultimately, excess pessimism amongst the analyst crowd may be a bullish [...]

  32. kaleberg says:

    I’m a big bear, but I’m expecting a rally based on cheap money and fat acquisition targets. When you can actually buy cash, not just cash flow equivalent, for less than 100 cents on the dollar, it makes sense to buy cash.

  33. philipat says:

    When the Wall St analysts appear on Financial TV, the magic word is “Operating Earnings”.

  34. Captain Jack says:

    It should make dedicated bears nervous…

    Dedicated bears should be nervous anyway, because allegiance to one side of the market is foolhardy. Even the grizzliest of secular bear markets can be subject to multi-month 60% rallies.

    In the classic Market Wizards books, one of the interesting queries Jack Schwager put to multiple traders is which indicators they felt were overrated or didn’t work. Many of them thought very poorly of oscillators, due to the tendency of RSI and the like to get overbought and stay overbought in bull markets, or get oversold and stay oversold in bear markets in vice versa.

    For those who agree with that general assessment, the net result of most oscillator-based indicators is thus “white noise” — coinflip fuzz with a long-run track record that is more or less overwhelmed by randomness.

    That about sums up the way I’ve grown to feel about contrarian calls based on what other elements of the crowd is doing. The times when an aggressively contrarian stance based on crowd behavior makes sense are the screaming extremes — like Q209 when everyone thought the world was going to end, or post-Greece when every bank trading desk thought the euro was headed straight from $1.20 to par.

    But when prices and sentiment are in the muddled middle, as we seem to be right now as far as equities go, the contrarian angle seems more like a coin flip / Cramer pick / white noise thing. If the signal is random, there’s no value to be extracted from it. Better to wait for screaming melt-your-eyeballs type indicators of overbought or oversold imho, or otherwise just proceed based on the strength of one’s own convictions and day to day methodological applications.

  35. southernboy says:

    I ran this claim about the low % of buy ratings by Francois Trahan, formerly chief strategist/quant at ISI, and now at his own shop, WolfeTrahan. He’s a very data-driven guy, who has been arguing that the Street is well behind the curve on the equity side. He said he thought the data behind the claim is bogus and that Street estimates were still way too high.

  36. [...] “Following the Wall Street crowd of analysts is rarely the way to make money,” writes Barry Ritholtz, an analyst. This somewhat paradoxical comment is in response to a story about how, despite bullish [...]

  37. Since when is a “hold” rating bearish? “Hold” means “hold this stock,” not “hold your dick,” right? And why would one put a “hold” rating on a stock? Because the expectation is for lower prices for as far as the eye can see? No, that’s not it. The underlying expectation is for further growth at some indeterminate time whose uncertain arrival prevents a “buy” rating.

    If you’re bearish, you sell. You do not hold. “Hold” is the deer on the railroad track hoping the approaching bright light will illuminate the bits of grain the last freight train dropped.

    Go back to the July-August 2008 period and observe sentiment then. You will find inordinately low bullishness and high bearishness, which in a bull market means something entirely different than it does in a bear market, as was amply demonstrated from September-October 2008.

  38. [...] it was Tony Robbin’s economic warnings, the excessive bearishness of Wall Street Analysts, or the the recession porn of the Hindenberg Omen, there has simply been too much negativity. Even [...]

  39. [...] according to McKinsey) — except at bottoms, when it is too pessimistic. Often times, it is a contrary indicator. If we include the fraud of the 1990s and 2000s, Wall Street research has worked as a mechanism for [...]