Equity Watch
One of the factors that propelled the markets over the past few weeks is strong earnings surprises. In the current earnings season, companies announced earnings results that were 10.9% above expectations in the U.S. and 8.9% in Canada. These positive surprises are leading analysts to increase their outlook. Over the past three months, the 12- month forward earnings have been revised upward by 1.5% in the U.S. This is the most positive revisions since 2005. In Canada, revisions are still negative, but the recent trend suggests we could see upward revisions soon.
There is one indicator that would be even more bullish than analysts increasing their earnings outlook: analysts upgrading their recommendations. Indeed, analysts often tweak their earnings estimates, but they only change their recommendations when they are convinced that the outlook is improving or deteriorating. For the whole market, we find that there is still some scepticism regarding the recent rally. On a recommendation scale of 1 to 5, (1 being a strong sell and 5 being a strong buy), the S&P/TSX has a recommendation of 3.8, which is just below a buy recommendation. This is exactly the same level it was three months ago, before the strong earnings seasons.
The bottom-line is that the current economic recovery is still not fully factored by the consensus. As analysts become convinced that the current economic rebound is sustainable, we are poised to see more recommendation upgrades, which obviously will be positive for the markets.
