Wall Street analysts remain downbeat about U.S. corporate earnings, but there’s significant optimism in one sector—health care. Analysts who cover health care stocks have raised earnings estimates for six consecutive months through August, according to the latest Wall Street Mood Monitor produced by 361 Capital, a Denver-based boutique asset manager.
The 361 Capital Wall Street Mood Monitor is a three-factor model that gauges the climate or “mood” for active management during a particular quarter within each economic sector. The factors are: analyst sentiment, earnings trends and stock correlations.
“Aside from the health care sector, where sentiment is positive and rising, sell-side analysts are becoming more pessimistic about the ability of U.S.-based businesses to continue posting earnings gains,” said John Riddle, CFA, chief investment officer for 361 Capital. “August marked the fourth straight month in which negative analyst revisions exceeded positive ones, and there have been more downgrades than upgrades in 11 of the past 12 months through August.”
“Additionally, intra-market stock correlations are once again elevated, because of heightened geopolitical risks and ongoing trade tensions, indicating growing headwinds for active managers,” Riddle said.
Higher-trending correlations imply less significance for individual stock selection. Lower correlations suggest higher stock-specific risk, which should create a more favorable environment for managers with superior stock selection strategies.
Intra-market correlation measures the average correlation between the returns of each stock in the grouping relative to the average return of all stocks in the universe. Intra-sector correlation measures the average correlation between the returns of each stock in a sector relative to the average return of stocks in that sector.
In health care, intra-sector correlations have climbed above the long-term average for the sector, but otherwise, the mood is upbeat as almost 73% of health care companies beat their earnings expectations for the three months through Aug. 31, the best showing by this sector since 2003, according to 361 Capital.