(Bloomberg) — The profit outlook for companies in the S&P 500 Index is rapidly deteriorating — yet analysts can’t raise their stock-price targets fast enough.
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Consider it the stock-market disconnect of 2023.
The two seemingly incompatible trends reflect how much equity prices are being driven by speculation that the Federal Reserve is nearing the end of its most aggressive rate-hiking cycle in decades. That particularly bodes well for the valuations of growth and tech stocks, which have held on to this week’s big gains even after disappointing earnings reports from Apple Inc., Alphabet Inc. and Amazon.com Inc.
But the degree to which analysts are raising stock-price targets while slashing the earnings estimates is puzzling for those used to seeing the market hinge on the underlying strength of corporate America.
“Interest rates have come down and your discount rate has come down, so even though your earnings aren’t going up, you could assign a higher…
2023-02-04 10:00:00 The Fed Is All That Matters to Stock Analysts Ignoring Earnings
Original from finance.yahoo.com Investors who ignore corporate earnings when analyzing stocks have the Federal Reserve to thank. That is because the Fed has turned market analysis into a game with only one player, as everything now seems to hinge on its actions.
Stock analysts are now almost exclusively spinning the news from the Federal Reserve and its various indicators, mostly to the detriment of corporate earnings. It wasn’t always this way. Before the 2008 financial crisis, there was discussion of financials, valuations and potential for growth in the company — based on their earnings. However, since then, stock analysts have focused primarily on macroeconomic concerns, such as the federal funds rate and inflation.
In the early days of quantitative easing and almost-zero interest rates, analysts thought that this would signal good news for the markets and corporations. But this hasn’t always been the case. In some cases, the Fed’s policies have had the opposite effect, contributing to a massive stock crash in August 2015.
In the following years, stock analysts began to pay close attention to the Fed’s every move and started to look to the central bank for guidance. And while it’s certainly prudent to stay informed of the Fed’s actions and their effects on financial markets, it’s also important to keep in mind that corporate earnings are still important.
Research shows that investors that have ignored corporate earnings have seen inferior performance, compared to those who still study companies’ earnings statements. That’s because while the Fed’s actions can have a major effect on markets overall, its policies will not necessarily translate to success for individual companies.
The lesson here is that stock analysts should still consider corporate earnings when making investments. Paying attention to the Fed is important, but it’s not the only thing that matters when it comes to making informed investment decisions. It’s also important to remember that corporate earnings a major factor when it comes to determining a stock’s long-term performance.