Stock Analysts More Bullish Than Market Forecasters

The Wall Street analysts who follow individual companies are much more bullish about stocks than the guys who actually try to predict where the market is headed.

Forecasts by individual analysts for S&P 500 member companies, if added together, would have the benchmark index jumping 16 percent this year.

New York Stock Exchange Traders
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New York Stock Exchange Traders

That's more than double the seven percent gain predicted by a consensus of market strategists, who look at the overall market and not individual companies.

While the analysts take a narrow view—one company instead of the overall market—their combined bullishness could end up being more accurate. That's because market strategists look at a lot of intangible things—such as risk from Europe's debt crisis—while analysts focus on hard data such as profit and customer demand.

Either way, a gain of anywhere from seven to 16 percent wouldn't be a bad year for investors, especially after the S&P 500 ended flat for 2011.

According to Goldman Sachs, the consensus target of equity strategists for the S&P is 1350, representing a seven percent gain. Goldman’s own equity strategist, David Kostin, sees a 1.5 percent decline to 1250, citing a “spillover from the European recession” in a note to clients.

The 16 percent return predicted by analysts, which Goldman also calculated, would be the best for U.S. stocks since the 20 percent rebound in 2009 following the U.S. financial crisis. It would be the third best return of the last decade as 2003’s market jumped 22 percent after a bottom in the technology-led bear market.

“I don’t think 16 percent is all that outrageous in light of the recovery that’s gaining steam and a Fed that seems content to keep the liquidity spigots turned on,” said James Iuorio, a trader and managing director at TJM Institutional Services.

In the latest string of positive data, the ISM Manufacturing Index released Tuesday showed activity and employment at the highest level for the sector since June. Federal Reserve minutes indicated that some members favor more accommodative measures, even with an improving domestic economy.

A number of individual analysts upgraded stocks on their coverage lists Tuesday, helping to fuel the market’s strong gain. JPMorgan recommended buying Cisco in a note that cited improving profit margins and mentioned “Europe” just once among its 26 pages. Morgan Stanley upgraded battery-maker Energizer and Goldman Sachs turned positive on some chipmakers .

“If the U.S. economy can continue to strengthen in 2012, which we think is very possible, that will provide a lift to stock prices,” said Andrew Fitzpatrick, director of investments at Hinsdale Associates. “Corporate profits, which have been tremendous, are poised to be a little worse as margins are suffering. They should still be strong enough, however, as the corporate sector is just too healthy. Valuation is attractive as most stocks have priced in at least some sort of slowdown due to the economy or Europe.”

To be sure, many remain skeptical of these bullish stock and earnings targets from individual company analysts. The group has a history of wearing blinders when macro issues such as unemploymentare concerned and a hesitancy to get more negative than a “neutral” rating on fear of some sort of retribution from companies or clients.

“It’s been my experience year after year that the top-down consensus almost always has to come up, and the analysts in the bottom- up consensus love their stocks a little too much and have to come down somewhere near earth,” said Patty Edwards, chief investment officer at Trutina Financial. “If we bump along at seven to 10 percent, I’d say we’re doing excellent for the year. But I’m not holding my breath.”

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