They’re turning more pessimistic even as they push up profit growth estimates. How joblessness will affect consumer spending is a big worry

By Rita Nazareth and Lynn Thomasson September 2, 2010,

Meyer Shields says earnings at Warren Buffett’s Berkshire Hathaway (BRK.A) will increase the most since 2006 this year. He’s also telling investors to sell the shares because the economic recovery is weakening.

When it comes to sending mixed messages, the Stifel Nicolaus analyst has plenty of company. For the first time since at least 1997, fewer than 29 percent of ratings on stocks covered by brokerages worldwide are “buys,” according to 159,919 recommendations compiled and tracked by Bloomberg.

Analysts are turning more pessimistic even as they push up profit-growth estimates among Standard & Poor’s 500-stock index companies to 36 percent, the highest since 1988.

“People are sitting on a fence,” says Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $550 billion.

“When I go and talk to our equity analysts, they look at the companies and say, ‘Boy, these companies look pretty good, earnings are O.K., they have plenty of cash. What if there’s a double dip?'”

Another reason Wall Street firms are becoming more reluctant to award “buy” ratings is that individual U.S. stocks are moving more in lockstep than they typically do. That limits the opportunity for analysts to identify outperformers, says John Praveen, chief investment strategist at Prudential International Investments Advisers.

The caution extends beyond the U.S. More than 54 percent of ratings for companies in the U.S., U.K., Japan, and Brazil are “holds,” the highest level since Bloomberg began tracking the data in 1997. While the proportion of “sell” ratings in the U.S. has fallen to 5.1 percent, half the level of 2003, the total combined with “holds” reached a record 71 percent last month, the data show.

While pessimism is increasing, analysts say profits for companies in the MSCI World Index of 24 developed nations will gain 28 percent in the next year. The MSCI index trades at 11.4 times forecast profit, data compiled by Bloomberg show. Except for the six months starting October 2008, the index has never traded below 12.5 times annual earnings.

Shields says his biggest concern is that joblessness will weaken consumer spending, which accounts for 70 percent of the U.S. economy. “Employment is much worse than what people have anticipated,” he says. “If I had to pick one single factor that underlies our negativity, that’s what it is.”

E. William Stone, chief investment strategist at PNC Wealth Management (PNC) in Philadelphia, says widespread nervousness about the economy is “a positive” because it gives investors a chance to find “a good company that’s being dragged down by the overall market.”

The bottom line: Analysts see companies boosting profits considerably but worry that economic weakness will sabotage their forecasts.

Source: Bloomberg News.