Here’s the next shoe to drop that will hit this market, Jefferies says
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Wall Street analysts and strategists have been caught off guard by the depth of this year’s pullback. It may not end until they catch up. Jefferies strategist Sean Darby, in a Monday note to clients, highlighted recent price target reductions by Wall Street analysts. We are traveling at light speed with the earnings momentum clock if we travel at warp speeds through the current interest rates cycle. Darby explained that sell-side analysts are increasing cutting target prices. This pushes more companies into “fallen angels quadrant”, which usually warrants their being removed from portfolios. According to Jefferies, banks and semiconductors have fallen into the “fallen angels” quadrant. But analysts have lowered multiples to their stock prices in order to reduce price target reductions. Even though there is growing concern about the possibility of a U.S. recession, earnings estimates remain mostly stable. Darby indicated that it’s unlikely that stocks will bottom before analysts begin to take into account the downsides and low earnings estimates. “Our analysis indicates that even though investors sentiment surveys are quite bearish, we have not seen the market bottom-triggering selling. If our analysis is correct, the final segment of the earnings momentum cycle includes both earnings cuts as well as a cut in target price. Darby stated that investors should be prudently placed. The process started but it is still very much in its infancy. Since March 31, analysts have cut their second-quarter earnings per share estimates for S & P 500 companies by just 1%, according to a note from FactSet’s John Butters on Friday. Meanwhile, the current net profit margin estimate for the 2022 calendar year is 12.6% for S & P 500 companies, according to Butters. This number stood at 12.7% on March 31. — CNBC’s Michael Bloom contributed to this report.
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