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Senior Earnings Analyst
John’s weekly research report, Earnings Insight provides analysis and commentary on trends in corporate earnings data for the S&P 500, including revisions to estimates, year-over-year growth, performance relative to expectations, and valuations. He is a widely used source for the media and has appeared on CNBC, Fox Business News, and the Business News Network. In addition, he has been cited by numerous print and online publications such as The Wall Street Journal, Financial Times, The New York Times, MarketWatch, and Yahoo! Finance.

During the fourth quarter, the S&P 500 index recorded an increase in value of 3.3% (to 2238.83 from 2168.27). During the past 12 months, the S&P 500 index witnessed an increase in value of 9.5% (to 2238.83 from 2043.94.03). Where do industry analysts believe the price of the index will go from here?

Industry analysts in aggregate predict the S&P 500 will see a 9.7% increase in price over the next 12 months. This percentage is based on the difference between the bottom-up target price and the closing price for the index at the end of December. The bottom-up target price is calculated by aggregating the median target price estimates (based on company-level estimates submitted by industry analysts) for all the companies in the index. On December 31, the bottom-up target price for the S&P 500 was 2456.39, which was 9.7% above the closing price of 2238.83.

spx bottom up target price 2017.png

At the sector-level, the Health Care sector had the largest upside difference between the bottom-up target price and the closing price (+16.6%), while the Telecom Services sector had the smallest upside difference between the bottom-up target price and the closing price (+1.4%).

How accurate have analysts been in predicting the future value of the S&P 500?

On December 31, 2015, the bottom-up target price was 2335.73. Compared to the actual closing price of 2238.83 at the end of December 2016, industry analysts overestimated the price of the index by 4.3% one year ago.

spx target price and closing price.png

Over the past 12 months (January 2016 to December 2016), 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 +9.9%. In other words, industry analysts on average have overestimated the final price of the index by 9.9% at the end of each month during the previous 12 months.

Over the prior 60 months (January 2012 to December 2016), 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 that same month one year later has been +0.4%. In other words, industry analysts on average have overestimated the final price of the index by 0.4% at the end of each month during the previous five years.

Small Uptick in Buy Ratings during Q4

Of the 11,414 ratings on S&P 500 companies at the end of the fourth quarter (December 31), 48.6% were Buy ratings, 45.4% were Hold ratings, and 6.0% were Sell ratings. During the fourth quarter, the overall number of ratings increased by 1.8% (to 11,414 from 11,213).

spx buy hold and sell ratings.png

Buy Ratings: Up 1.7%

The number of Buy ratings increased by 1.7% (to 5,547 from 5,456) compared to Q3. Eight sectors saw an increase in Buy ratings, led by the Industrials (+9%) and Consumer Staples (+7%) sectors. Three sectors witnessed a decrease in Buy ratings, led by the Telecom Services (-16%) and Financials (-11%) sectors.

At the company level, in terms of Buy ratings, Envision Health Care (+7), Transocean (+5), and Mid-America Apartment Communities (+5) recorded the largest increases in the number of Buy ratings during the quarter, while Harman International Industries (-9), Level 3 Communications (-8), Keycorp (-8), and Time Warner (-8) witnessed the largest decrease in the number of Buy ratings over this time frame.

Hold Ratings: Up 2.6%

The number of Hold ratings increased by 2.6% (to 5,180 from 5,050) relative to Q3. Seven sectors witnessed a rise in the number of Hold ratings, led by the Telecom Services (+17%), Financials (+12%), and Consumer Staples (+11%). sector. Four sectors witnessed a drop in the number of Hold ratings, led by the Materials (-16%) sector.

At the company level, in terms of Hold ratings, Citizens Financials Group (+7), Level 3 Communications (+7), Zions Bancorporation (+7), and Chesapeake Energy (+7) recorded the largest increases in the number of Hold ratings during the quarter, while Xerox (-5) and Nucor (-5) saw the largest decreases in the number of Hold ratings over this time.

Sell Ratings: Down 2.8%

The number of Sell ratings decreased by 2.8% (to 687 from 707) relative to Q3. Four sectors witnessed a rise in the number of Sell ratings, led by the Telecom Services (+20%) and Financials (+12%) sectors. Seven sectors witnessed a drop in the number of Sell ratings, led by the Real Estate (-23%) and Energy (-11%) sectors.

At the company level, in terms of Sell ratings, Entergy (+3) and Murphy Oil (+3) saw the largest increases in the number of Sell ratings during the quarter, while HCP (-4), Deere & Company (-4), and Chesapeake Energy (-4) saw the largest decreases in the number of Sell ratings during this time.

Sector-Level Ratings

Overall, analysts are most optimistic on the Health Care and Information Technology sectors, based on the percentages of Buy ratings at the end of December. These two sectors tied for the highest percentage of Buy ratings (56%) of all eleven sectors at the end of Q4. On the other hand, the Utilities sector continued to have the lowest percentage of Buy ratings (35%) of any sector.

Analysts are most pessimistic about the Energy, Utilities, and Consumer Staples sectors, based on the percentages of Sell ratings at the end of December. These three sectors tied for highest percentage of Sell ratings (8%) of all eleven sectors at the end of Q4. On the other hand, the Health Care sector had the lowest percentage of Sell ratings (2%).

Download the full edition of this quarter's Targets & Ratings Quarterly for in-depth analysis and charts.

Download the full Targets and Ratings Quarterly report
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