Almost every analyst slashed earnings forecasts during the height of the economic crisis. Then, naturally, some started to upgrade once they realzed that the world economy had stepped back from the brink.
So has this gone too far?
Citi’s Tobias Levkovich shows that earnings upgrades for the S&P500 have hit 65% of all adjustments (in blue, below). This means that the majority of earnings changes have been upward.
Some sectors have experienced an even sharper change in sentiment.
For example, in the semiconductor space nearly 90% of earnings changes have been upward revisions (below). 80% of Tech Hardware & Equipment earnings adjustments were upgrades as well (not shown).
The Materials sector has also experienced a rather buoyant change in outlook. Over 75% of adjustments have been upward.
Where have analysts been more subdued with their changes?
Telecom and Utilities’ earnings adjustments have only been about 20% and 30% positive, respectively. Here the majority of analysts changes continue to be downward. As a contrarian indicator, this could be a good thing.
Given that stocks have already rallied substantially since March, the concern for the hottest sectors is that some analysts may have overshot their upgrades. Thus sectors with the most upward revisions may have the most room to disappoint once Q3 earnings come out and analysts struggle to make their forecasts line up with reality.
(Charts and data via Citi, “Monday Morning Musings”, Tobias Levkovich, 2 October 2009)