(Bloomberg) — The profit outlook for companies in the S&P 500 Index is rapidly deteriorating — yet analysts can’t raise their stock-price targets fast enough.
Most Read from Bloomberg
Consider it the stock-market disconnect of 2023.
The two seemingly incompatible trends reflect how much equity prices are being driven by speculation that the Federal Reserve is nearing the end of its most aggressive rate-hiking cycle in decades. That particularly bodes well for the valuations of growth and tech stocks, which have held on to this week’s big gains even after disappointing earnings reports from Apple Inc., Alphabet Inc. and Amazon.com Inc.
But the degree to which analysts are raising stock-price targets while slashing the earnings estimates is puzzling for those used to seeing the market hinge on the underlying strength of corporate America.
“Interest rates have come down and your discount rate has come down, so even though your earnings aren’t going up, you could assign a higher price [on the stock] just because of the lower discount rate,” said Crit Thomas, global market strategist at Touchstone Investments. “They’re saying, ‘Hey, we’re going to be out of this within six to 12 months, so let’s just look through it.”
Fourth-quarter reporting season has done little to support optimism about the fundamentals. Earnings in sectors from energy to consumer discretionary have been coming in below pre-season estimates and companies are dialing back outlooks based on expectations growth will slow. In fact, Bloomberg Intelligence’s model shows that such earnings guidance for the first quarter has been cut by the most since at least 2010.
Story continues
That’s forced analysts who stuck to rosier estimates to follow. Among all changes analysts made to their earnings projections last month, just 37% were upgrades, data compiled by Citigroup Inc. show. The level has been associated with the past three economic recessions and is 30% below a historical average.
“To us, 2023 analyst numbers looked too aggressive,” Drew Pettit, director of ETF analysis and…
..
