US stock market price targets and analysts - Some numbers about the industry

By: Nicholas Lozupone

What are sell-side analysts?

The larger brokerage firms employ experts in specialized industries to collect information for reports that forecast earnings-per-share on company stocks they then use to identify stock price targets (the fairly valued price of stock set by an analyst). We refer to them as “sell-side analysts.” The best analysts specialize in a specific industry, e.g., the pharmaceutical or grocery industry or another industry in which they have expert knowledge.

Once an analyst determines a price target they feel is accurate (even though their calculations are usually anything but), they will issue a buy, sell, or hold rating on that specific stock. For example, let’s say the current price for stock in a company is $80 per share, but the analyst believes it will go up to $105 based on the data they have collected; the analyst will then give a buy rating on the stock in that company before it rises. Likewise, if an analyst forecasts a stock price will fall in the future, they will issue a sell rating instead.

Essentially, a sell-side analyst wants you, as an investor, to take your trading volume and do business with their brokerage firm or investment bank. In this sense, a sell-side analyst adds value to the company that employs them and the market sector relevant to their reports. To a large degree, the market relies heavily on information provided by this type of analyst because of the assumption that the analyst is an expert in their specialized firm or industry. In other words, sell-side analyst reports offer general aid to market participants.

How do sell-side analysts differ from buy-side analysts?

On the other end of the market analyst spectrum, you have “buy-side analysts.” A buy-side analyst works for a specific organization, offering advice on where to invest its assets. Pension funds, mutual funds, and charitable organizations, to name a few, employ this type of analyst to clobber together research reports that identify profitable investment opportunities. Of course, a buy-side analyst’s report considers several factors, such as their employer’s risk appetite or the returns they want to achieve.

How do sell-side analysts earn their commissions?

According to the research firm Greenwich Associates, “advisory services” account for about 60% of a sell-side analyst’s equity commission. These “advisory services” include, most importantly, corporate access. In simpler terms, a sell-side analyst is responsible for having direct access to a company’s management while maintaining a relationship with that company. Fostering a close working relationship with a company on behalf of a client is necessary if the sell-side analyst desires access to an individual company’s studies on various products and ratings on security positions within that organization.

However, the relationship a sell-side analyst cultivates with a company can influence the analyst’s forecast of stock price targets for that company’s shares. For example, if a sell-side analyst does not give their clients a favorable rating for a company’s stock, that company may sever its relationship with the sell-side analyst. Biasness, more often than not, seeps into a sell-side analyst’s stock forecast. For this reason, a sell-side analyst’s report on the future health of a company’s stock is usually misleading or downright inaccurate.

Some of the other crucial services a sell-side analyst provides comprise undertaking cross-sector and cross-regional studies about the industry in which they specialize. In addition, a sell-side analyst will host and attend conferences and seminars where information, through company-management presentations, is shared and disseminated for clients. This aspect of an analyst’s profession is not to be underappreciated, as it can generate substantial banking revenue for a firm if done thoroughly.

In return for these essential services, broker-dealers will pay sell-side analysts with gratuities, soft dollars (payments given to brokerage firms for their services through commission revenue), or payments in full.

How many broker-dealers offer equity research services?

On average, 3,500 broker-dealers operate in the U.S., of which only about 200 offer accurate and consistently reliable equity research services.

What do analyst research firms do with their data?

Of the 200 analyst research firms in the U.S., approximately 50 of them sell the information they collect directly to their clients. Moreover, if you are an overseas broker-dealer, 20 firms outside the U.S., specifically in Canada and the U.K., offer high-end equity research services on central exchange markets in the U.S.

How many active sell-side analysts are there in the marketplace?

To get a clearer picture of how crucial an analyst is to the capital success of their client, keep in mind that the top ten U.S. investment banking companies (e.g., Bank of America, JP Morgan, Stifel, etc.) contract over 50 analysts at a time. Contrast this with mid-size and boutique firms specializing in coverage of specific industries that trade smaller volumes of outstanding shares.

Today around 2,000 active analysts cover 4,000 publicly traded shares out of over 11,000 total stock shares bought and sold on U.S. markets, of which about half are employed by companies.

The median career length of a sell-side analyst lasts less than 20 years. On average, they only work for a few different employers throughout their professional lives (most of which go on to work as investor relations managers for public firms). That is to say, to be financially prosperous in this day and age while simultaneously remaining one step ahead of the competition, clients must never relent in their pursuit of accurate share valuations and market conditions.

What are the top stock issuers with the highest coverage?

Start by examining the top ten stock issuers with the highest active coverage beginning with Apple (AAPL), which has garnered over 2,500 price targets and share ratings, followed by Amazon (AMZN), Meta (META), Tesla (TSLA), Micron (MU), Nvidia (NVDA), Intel (INTC), Twitter (TWTR), and Chipotle (CMG).