Analyst buy recommendations at two-decade highs, here’s what this means for investors

Is there such a thing as too much good news? Not when it comes to the stock market. Buy signals are at a two-decade high, as US stocks continue to beat earnings expectations — sending stock prices to record levels. Despite the market enthusiasm, US GDP continues to be below expectations.

For some, this might be a warning: things are too good to be true and these buy recommendations come at a suspicious time.

Beware the suits: On Wall Street, fund managers rarely pay attention to ratings. In most cases, by the time they’ve reached the public, it’s already too late.

Tony Scherrer, a researcher for Smead Capital Management, doesn’t invest according to the ratings.

• Instead, he uses these signals as a heat check on stocks.
• i.e. If there are too many “buy” ratings, he’ll take it as a signal to look elsewhere.

For those with longer time horizons, the ratings and price targets matter even less — which tends to fluctuate in the short-run.

Looking forward: Companies are reporting big earnings growth but there are worries over its sustainability  — with some analysts telling investors to beware (via FT):

• Be cautious as economic growth slows in the next year — warns Leibovitz.
• Company profit margins could be at risk from higher business costs — warns Max Gokham of Pacific Life.

For long-term investors, short-term movements rarely matter and neither should these ratings. Even if US stocks see a correction and your portfolio loses some value in the short-term, what’s a small drop in the big picture?