Sell-Side Analysts Can’t Rate Stocks a “Sell”


New York, NY – While this should come as no surprise to anyone who watches the financial markets, the recent sell-off in the U.S. equity markets has done nothing to change sell-side analysts’ unwillingness to provide a sell rating on stocks.  In fact, today none of the stocks in the S&P 500 have consensus “sell” ratings from Wall Street analysts.

Since the end of June, the S&P 500 index has fallen 7.8% — a performance that belies the extremely volatile and bearish sentiment that has pervaded the markets for most of the summer.  However, based on a recent study conducted by Standard & Poor’s, none of the 1,485 stocks that make up the S&P 1,500 has a consensus “Sell” rating, while just five stocks, or 0.3%, are ranked as being a “Weak Hold.”

Now, some might argue that a number of sell-side analysts could have placed “Sell” ratings on individual stocks, while few companies had “Sell” ratings on a consensus basis.  However, this has not really been the case.  In fact, the S&P study revealed that there were just 167 (0.08%) “Sell” recommendations and 697 (4.2%) “Weak Hold” recommendations out of a total of the 19,868 Wall Street research reports evaluated.

The extremely low percentage of “Sell” and “Weak Hold” ratings that sell-side analysts make has been a well-established pattern over the years.  In fact, this was one of the factors that regulators pointed to a decade ago when they established the Global Research Analyst Settlement, as they argued that Wall Street’s reliance on investment banking fees caused this “optimistic bias”. 

Some argue that the sell-side’s unwillingness to make “Sell” calls on stocks is due to their fear of retaliation from the company, leading them to lose access to management or even lose lucrative banking deals.  This is one of the issues raised in the recent complaint by AIG’s CEO over the research ratings they have received from the sell-side.  

However, others argue that the reason for Wall Street’s bullish outlook is based on the view that the US stock market has grown over history, thereby making a “Buy” the natural call for an analyst, whereas a “Sell” would be extremely unusual.

If this were the case, you would expect a large number of “Buys” and low number of “Sells”.  Strangely enough that is currently not the case.  According to the S&P study, only 79 (or 5%) of the 1,485 stocks in the S&P 500 have consensus “Buy” recommendations, while 1,003 stocks (68%) are ranked “Buy/Hold,” and 398 stocks (27%) are ranked “Hold.”

In other words, Wall Street equity analysts have little confidence in the near-term direction of the US stock market.


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