Analysts shrug off U.S. Q2 earnings, hit downgrade button

By Jennifer Robin Raj & Mary Meyase

BANGALORE (BestGrowthStock) – America Inc’s latest quarterly report card was generally good — plenty of firms beat estimates and gave bullish guidance — but analysts, eyeing the broader macro-economic clouds and weighing the chances of a double-dip, have responded with a bearish bias.

According to Thomson Reuters StarMine data, there were 30 percent more downgrades than upgrades during the second-quarter earnings season from mid-July to mid-August, a significant turnaround from research calls over the last 60 days when there were 7 percent more upgrades than downgrades.

Analysts “don’t want to stick their necks out,” said Dan Greenhaus, Chief Economic Strategist at Miller Tabak & Co.

“The case for a materially higher equity index and stock upgrades is a tough sell to clients and a tough sell for analysts to make in the face of economic data that, with each passing month, don’t show any improvement,” he said.

According to data published last month, the U.S. economy grew more slowly in the second quarter than the Commerce Department had predicted as late as July.

“The economy is still growing slowly. That hasn’t changed,” said Michael Hoffman, Director of Equity Research at Wunderlich Securities.

“It’s just people’s perception of it that has. And that has to be worked through everybody’s models and you have a whole bunch of analysts going to the sidelines.”


Sectorally, energy and technology were the most downgraded, while financials saw marginally more upgrades.

Financial stocks have been overshadowed by generally negative sentiment but, as balance sheets improve, analysts see some opportunity.

“Most upgrades have been on the back of improving loan/loss reserves, improving credit metrics and a variety of macro factors,” said Miller Tabak’s Greenhaus.

The S&P Financials Sector Index (.GSPF: ) has rallied 145 percent since the post-crisis low in March 2009, almost double the broader S&P 500 Index’s (.SPX: ) rise over that period. So far this month, the financials sub-index is up more than 8 percent, outpacing the S&P 500’s 5 percent gain.

While financial stocks saw 10 percent more upgrades over the second-quarter earnings season, analysts were downbeat on the energy sector, with 46 percent more downgrades than upgrades.

“The underlying business and fundamentals aren’t great for offshore drillers,” said Wunderlich’s Hoffman. “So whatever play you’re going to make you’re looking onshore and even that, with supply issues changing, is putting pressure on stocks. Hence the downgrades.”

Analysts were equally cautious on the IT sector amid concerns that technology spending may slow in the back half of the year, said David Hilal, Associate Director of Research at FBR Capital Markets, noting the third quarter is usually tough with inventory build-up ahead of a seasonally stronger last quarter.

“As we get into September and October, we will have a much better read about the fourth quarter,” Hilal said. “Over the next month, everybody on Wall Street will get a better feel for the propensity to spend on IT in Q4 and that will drive sentiment.”

Both the S&P Information Technology Sector Index (.GSPT: ) and S&P Energy Sector Index (.GSPE: ) are down around 7 percent year-to-date, while the S&P 500 Index is off just 1 percent.

(Reporting by Jennifer Robin Raj and Mary Meyase in Bangalore, Editing by Ian Geoghegan)

Analysts shrug off U.S. Q2 earnings, hit downgrade button