Signal or Noise? The Changing Impact of Analyst Recommendations in Volatile Markets

Sammanfattning

This study investigates the predictive power of analyst recommendations, with particular emphasis on their effectiveness during periods of market stability compared to times of crisis. Drawing on a sample of Swedish listed companies from 2014 to 2024, we construct portfolios based on favourable (buy), neutral (hold), and unfavourable (sell) recommendations to assess whether these signals differentiate between companies with superior and inferior future performance. Our analysis covers a stable market period (2014-2019) and a crisis period (2020-2024), marked by the COVID-19 pandemic and the Russian invasion of Ukraine. We find that, under stable market conditions, favourable recommendations are associated with significantly positive abnormal returns and alpha, while neutral and unfavourable recommendations exhibit weaker and statistically insignificant performance. However, during the crisis period, the predictive power of analyst recommendations diminishes considerably. Although favourably rated stocks continue to deliver the highest raw returns, their risk-adjusted performance deteriorates, and none of the portfolios generate statistically significant abnormal returns or alpha. These findings indicate that analyst recommendations are more informative in stable environments but lose much of their effectiveness amid heightened uncertainty and macroeconomic volatility.