Just 5.6% of current Wall Street analyst ratings of S&P 500 companies are in the 'sell' category
A fundamental imbalance exists between Wall Street “buys” and “sells.” For example, how should an investor interpret a recent upgrade of DoorDash stock and the downgrades of both Dropbox and PayPal Holdings?Logically, the ratings downgrades are probably a bad omen for Dropbox DBX, -1.41% and PayPal Holdings PYPL, -1.98%, but DoorDash’s DASH, -0.01% upgrade? It means less. That’s because a Wall Street downgrade is a lot rarer, and therefore carries more significance than an upgrade.
Don’t assume that the lopsided plurality of “buys” over “sells” is bullish. As you can also see from the chart, there’s nothing particularly unusual about the much greater proportion of “buy” ratings than “sells;” the current percentages are almost precisely equal to the five-year average. Apparently, Wall Street firms have only limited susceptibility to being shamed. Prior to Rule 2711 going into effect, the percentage of “buy” ratings for S&P 500 companies from Wall Street analysts fluctuated in a range between about 60% and 80%, according to FactSet data. That range shifted downwards by about 15 percentage points after 2002, while the range of “sell” ratings shifted upwards by about three percentage points. That still left about 10 times as many “buys” than “sells.
Downgraded stocks still have significantly underperformed, according to the researchers. So it still makes sense to pay attention to Wall Street analysts’ ratings, but you may want to focus more on their downgrades than their upgrades.
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