Rising Optimism: Analysts Say "Buy" Despite Earnings Uncertainty

Is it time to back up the truck and start loading up on equities? 

Analysts seem to think so, according to a June 23 report from researcher FactSet.

That’s despite more companies issuing disappointing earnings estimates than companies issuing upbeat guidance for the current quarter. 

According to FactSet’s Earnings Insights report from June 9, although analysts are forecasting S&P earnings to decline in the current quarter, they project EPS growth to return in the second half of the year. 

Analysts are optimistic again about the energy sector, where market-cap leaders Exxon Mobil Corp. NYSE: XOM and Chevron Corp. NYSE: CVX both snagged ratings of “moderate buy.” 

Of 10,981 ratings on S&P 500 stocks, FactSet found that 54.8% have consensus ratings of “buy,” 39.6% have “hold” ratings and only 5.6% have “sell” ratings. That proportion of analyst “buy” ratings is slightly higher than the five-year average, while the other two consensus views are below their five-year averages. 

Beaten-Down Sectors Bounce Back

There’s a phenomenon in investing, as well as sports and other fields, known as “worst to first.” In the stock market, it refers to an asset class that’s been beaten down so far that value-minded investors see an opportunity and jump in, sending shares higher. 

Maybe it’s not always literally the bottom of the valley to the top of the mountain when it comes to broad S&P sector performance, but every year, numerous funds and asset managers compile sector performance to show how last year’s winners have moved down, and last year’s losers are now among top performers.

The contrast between sector performance in 2022 and 2023 makes that concept clear. While energy, as tracked by the Energy Select Sector SPDR Fund NYSEARCA: XLE, was the runaway leader in 2022, it’s the laggard among all 11 S&P sectors this year. 

Factset found that 64% of analysts are optimistic about energy. Next in line for highest percentage of “buy” ratings include communications services at 62% and information technology at 60%.

Techs Trading at High Multiples

Communications services and info tech both trade at high multiples. Those analyst ratings can frequently apply for any time in the next 18 months, meaning stocks or sectors with lofty valuations may be ripe for a pullback. 

For that reason, it’s important to view those analyst “buy” ratings through a slightly different lens than you might with a beaten-down sector such as energy. 

The largest component within the info services, by market capitalization, is Meta Platforms Inc. NASDAQ: META, with a 24.72% weighting. The stock is up nearly 140% year-to-date. 

That alone is responsible for much of the sector’s gain. As a whole, the Communication Services Select Sector SPDR Fund NYSEARCA: XLC has advanced 33.49% in 2023 versus its 2022 decline of 37.63%. As a whole, the sector has a forward P/E ratio of 26. That’s “priced to perfection” level, meaning there’s likely some overvaluation going on.

The tech sector, as tracked by the Technology Select Sector SPDR Fund NYSEARCA: XLK, has a forward P/E of 27, so you can apply that same thought process here.

Analysts' Estimates Still Rising

However, even with the current AI mania that’s pushing techs such as Nvidia Corp. NASDAQ: NVDA higher, analysts’ estimates are rising across the board. In other words, pundits can snicker about an AI “bubble,” but it’s the anticipation of earnings growth sending techs higher. 

But that doesn’t make sense for the energy sector, where slower economic demand is hobbling stocks, and where analysts expect earnings to decline this year. Many analysts believe energy stocks actually look cheap at the moment, as commodity prices may rise again, sending shares higher. 

S&P energy sector stocks with the highest number of “buy” ratings include Targa Resources Corp. NYSE: TRGP, Halliburton Co. NYSE: HAL, and Schlumberger Ltd. NYSE: SLB. Analysts expect all three to grow earnings at double-digit rates this year and next.