Wall Street's pie-eyed enthusiasm to "buy stocks now" was made even more palpable yesterday. According to FactSet, the average analyst's bottom-up S&P 500 target price for the year ahead was 2256.59. That implies 10.5% upside from yesterday's close. Meanwhile, analysts have been pulling back their expectations for Q1 S&P 500 earnings and Reuters reports "weak earnings expectations sets [the] stage for stock gains."
First off, just consider the accuracy of that 2256.59 bottom-up S&P 500 target. Here's FactSet:
"The average difference between the bottom-up target price estimate at the end of the month one year ago and the final price for the index at the end of the same month one year later has been +6.8%. In other words, industry analysts on average have overestimated the final price of the index by 6.8% at the end of each month during the previous year."
The reason for the serial over-optimism? Sell side analysts have been perennially bullish. Remember: "Of the 11,584 ratings on S&P 500 companies at the end of the first quarter (March 31), 50.8% were Buy ratings, 43.8% were Hold ratings, and 5.4% were Sell ratings."
This while analysts have, in fact, begun ratcheting back their earnings expectations for Q1 2016. According to FactSet:
"During the first quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q1 bottom-up EPS estimate (which is an aggregation of the estimates for all the companies in the index) dropped by 9.6% (to $26.32 from $29.13) during this period."
That was the largest drop for a quarter since Q1 2009.
And yet the latest bit of permabull storytelling suggests that falling earnings expectations will send stocks higher, as companies beat those dismal expectations.
That argument doesn't hold water. What this bullish interpretation doesn't account for is that all S&P 500 sectors are bumping up against tough comps in Q1 and Q2 of 2016. For our take on this, watch Hedgeye CEO Keith McCullough in the video below: