The stock market may have rebounded from its lows earlier this year, but financial analysts expect the effects of COVID-19 to linger well into 2022, according to a new study that used analyst forecasts to gain insight on future performance.
“[Analysts] think the scars of this recession are going to last into 2022,” said one of the authors of “Earnings Expectations in the COVID Crisis” and an MIT Sloan professor of financial economics, along with Augustin Landier, a professor of finance at HEC Paris. “It’s a long time, a long recession, and not very reassuring to be honest.”
In examining analysts’ earnings per share forecasts, the authors had expected that analysts would be pessimistic on companies’ results in 2020, “but how much so, and for how long” was the question Thesmar said they aimed to answer.
To find out, the authors selected the top 1,000 companies by total market capitalization (as of the end of 2019) that were trading on the New York Stock Exchange, Nasdaq, or NYSE American. For each company, the authors compared the change in a company’s stock price with analysts’ forecast revisions for each fiscal year between 2020 and 2024.
COVID-19 effects expected to linger into 2022
The authors’ research — spanning the period between February 15 (when the market sell-off began and analysts started cutting their forecasts) and May 11 (the last time the authors pulled the data) — provides important insight on how long analysts think it will take for the economy to recover.
Thesmar said analysts on average are expecting negative earnings growth (-5%) this year (down from prior estimates of 10% – 12% growth). While grim, Thesmar noted that the revision of analysts’ estimates was actually smaller than he expected and “less drastic” than prior research based on asset prices only has suggested. “Analysts revised [their estimates], but not dramatically so,” he said.
In addition, the study shows that analysts believe the effects of COVID-19 will affect top companies for the next two years, but after 2022, they expect the situation to improve. There was a smaller difference between the analysts’ prior long-term forecasts and current long-term forecasts. “Short-term forecasts for 2020 and 2021 were adjusted much more, suggesting COVID-19 is bad news in the short run, not so much the long run,” Thesmar said.
Negative forecasts move the stock market in tandem
The authors also discovered that companies’ cumulative returns were consistent with analysts’ revisions; as analysts revised their estimates downward, investors responded in tandem.
“If the stock market declined, and then rebounded quite a bit afterwards, that movement can almost entirely be explained by analysts’ negative revisions,” Thesmar said. “When you do the math, you do find that the overall market decline is consistent with the downward revisions of analysts.”
For example, the financial sector (hit hard by the pandemic) recorded a lower cumulative return when analysts cut their forecasts for 2021, whereas the health care sector (where demand from consumers is more resilient) fared better.“
Steady revisions in analysts’ forecasts explain most of the downward revision in equity values,” Thesmar said.