Wall Street’s 2011 Stock Market Outlook: Up but Not Over-optimistic

Tuesday, January 11, 2011

There have been some warnings that the US stock market’s rise has produced over-optimistic forecasts. However, Wall Street’s published 2011 stock market outlooks look reasonable, even a bit conservative.

Here’s the picture…

The consensus outlook – good sources

Two articles are especially helpful in defining the consensus.

Barron’s – “Outlook 2011 (December 20, 2010)

This article describes a roundtable discussion by major investment firms’ strategists, with many excellent observations. The subtitle summarizes the consensus:

“Our group of investment experts sees stocks continuing their climb next year as the economic recovery takes root.”

CNN/Money – Stock outlook for 2011: Recovery rally will continue(January 4)

This article, based on a survey of investment strategists and money managers, produces the same outlook as Barron’s. Importantly, it has a table of the individual results that give us the data to evaluate Wall Street’s projections.

The consensus outlook – by the numbers

Here are the results from the CNN/Money survey table.  These charts use the forecasts of the 27 strategists/managers who forecast both the S&P 500 Stock Index’s 2011 earnings per share and its 2011 year-end value.

Notice that the percentage gains for both earnings and the index value are reasonable and similar at around 10%. The projections also have a similarity  with one another, shown by the following chart.

The consensus outlook – consistency

We can view the relationship of the two forecasts by looking at the resulting 2011 year-end price/earnings (P/E) ratio.

There are two observations to note:

  1. Regardless of the earnings estimates, the relationship between the index’s ending value and the earnings is fairly consistent.
  2. Most of the forecast 2011 year-end P/E ratios are slightly below the actual 2010 year-end P/E ratio of 15. Only six managers expect a “P/E expansion,” generally caused by increased investor interest in US stocks.

So… Although the US stock market has been performing well, the rise seems to have had little effect on Wall Street’s analytical process. In spite of some warnings that over-optimism has returned, reasonableness, with a bit of conservatism, seems to be the rule.

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January 2011