Street Analyst Estimates Change Dramatically

At present, it seems that analyst opinion is fairly bullish, but it's important for investors to remember that sentiment can change - and quickly!

Ian Tam, CFA 18 September, 2020 | 1:45AM
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Ian Tam: As we come to the end of an interesting summer, investors may wonder what's next for equity markets. To help with this, I thought to look at street analysts to see if we can glean some insights from their estimates.

The first table here shows a broad measure of analyst sentiment, which is measured by the change in estimates for companies' earnings per share. In a nutshell, this measure compares the street estimate for a stock's earnings as it appears today to what it was 90 days ago. When the consensus estimate for a stock's earnings moves upwards, this is a signal to investors that analysts are more bullish now than they were 90 days ago.

You can see from the chart that over the last 90 days the median estimate revision in the basic materials sector is 20.6% in the positive direction, which is very bullish; while the median estimate revision for technology companies is negative 4.3%, which is somewhat bearish. And if we have a look at the market as a whole represented by the 380 companies that have more than three active estimates, the median revision is positive at 6.4%.

The reason this is important is because this is a drastic shift. At the end of May, sentiment was actually much more dire. You can see that in the second chart, at the end of May, the 90-day change in estimates hit almost a negative 27%, worse than what we observed during the financial crisis of 2008-2009.

Although at present it seems that analyst opinion is fairly bullish, it's important for investors to understand that sentiment from analysts can change rather quickly, and analysts can sometimes be wrong. For long-term investors, these shifts in analyst sentiment really shouldn't affect the way that you structure your portfolio, but they can be useful in understanding general market sentiment in the short term.

For Morningstar, I'm Ian Tam.

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About Author

Ian Tam, CFA  is Investment Specialist at Morningstar Canada. 


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