United States stocks may be vaulting from one record to the next, but Wall Street analysts covering them are in no rush to keep up. Researchers who follow individual companies and almost always predict shares will go up are slashing their views on S&P 500 index companies at a faster pace than raising them for the second time since the war in Iran began, data compiled by Bloomberg Intelligence show.
Analyst Sentiment Turns Cautious
In the broader Russell 3000 index, the proportion of members with a “buy” recommendation is almost exactly where it was four years ago and is well below a dot-com peak, according to data from Jefferies LLC. This newfound skepticism is viewed as a healthy development from a contrarian perspective, as it means sentiment is far from reaching a fever pitch that often heralds a top.
“I tend to think of sentiment through the lens of ‘are there more incremental buyers or sellers?’” said Andrew Greenebaum, senior vice-president of equity research product management at Jefferies. “The sell side doesn’t show the signs of buying in — yet.”
Record Rally but Narrow Participation
The S&P 500 has posted record after record since mid-April amid hopes for a peace deal in Iran and enthusiasm around the profit potential of artificial intelligence technology. The index has advanced for nine consecutive weeks, gaining 20 per cent during that time, in what has been the strongest winning streak of this length in 75 years, according to LPL Financial.
While overbought conditions are flashing warning signs and participation in the rally remains narrow, few signs of outright euphoria are in place. The share of Russell 3000 constituents with a buy recommendation is sitting at 82 per cent, slightly above the long-term average but below the 90 per cent peak at the turn of the century, according to Jefferies data.
Contrarian Indicators Remain Neutral
At Bank of America Corp., a contrarian indicator that tracks strategists’ recommended allocation to stocks remains in “neutral territory,” despite rising over the past month. The reading is still below levels reached in prior peaks and implies “a healthy S&P 500 price return of 12 per cent over the next 12 months,” BofA strategists Victoria Roloff and Savita Subramanian wrote in a June 1 note to clients.
And the latest survey from the American Association of Individual Investors indicates bears continue to outnumber bulls. To Greenebaum, the setup creates “one of the most reluctant rallies in a long time.”
Risks Remain
To be sure, a lack of euphoria is no guarantee that gains will continue, particularly as other warnings signs mount. Valuations remain elevated by historical standards and tech concentration has reached extremes — all while discussions between the United States and Iran around reaching a deal to reopen the Strait of Hormuz have been in a holding pattern. Iran on Monday said it would suspend “talks and the exchange of documents through mediators” in protest of Israel’s assault in Lebanon while warning it could target northern Israel if the attacks continue, according to the semi-official Iranian Students’ News Agency.
