The current situation is another test for the optimists. Inflation is running so rampant at 7.5% that the Federal Reserve will have to embark on a rate-increase cycle that could risk tipping the economy into recession. Even in a best-case scenario, rising interest rates will mean higher funding costs for companies, threatening the durability of some of the highest equity valuations in recent history.
Certainly, investors can’t be blamed for trying to pick some winners, and that’s an area that stock analysts specialize in. Even if you think stock indexes are about to get crushed, what are you going to do? Park your money in cash and let inflation eat away purchasing power?
With most companies having reported for the latest quarter, some 76% have delivered a positive earnings surprise. Some will withstand whatever the next year brings with Ukraine and the Fed—and inevitably, a handful will make for epic investments.
Dip-buying is ultimately a part of healthy markets, and it will happen no matter what stock analysts say. But in this turbulent market, I worry about the false sense of assurance people get when they consult a report and decide that the war in Europe and other risks aren’t material because the company happens to be doing well.
The incentives in sell-side analysis are well known: Brokerages profit from trades, and firms get more trades when they recommend buying. Analysts also need access to company executives, and CEOs can stop answering the phone if they don’t like an analyst’s research. The current bullish calls add another layer of sanguineness. The past few weeks notwithstanding, the incredible bull market of the past decade has lulled investors into a sense of complacency, and analysts aren’t doing them any favors by blithely going along for the ride.
Jonathan Levin has worked as a Bloomberg journalist in Latin America and the U.S., covering finance, markets and M&A. Most recently, he has served as the company's Miami bureau chief. He is a CFA charterholder.