Equity research analysts are putting "buy" recommendations on a higher proportion of companies they cover and on their investment banking clients than at any time since they paid $1.4bn (€1.1bn) over conflicts of interest in a settlement with Eliot Spitzer at the end of 2002.

The rapid increase in the number of buy ratings comes against a background of booming global equity markets and is causing concern among senior analysts and investors. The head of European research at one US bank described it as a "major problem". Nearly 42% of stocks covered by 10 of the largest investment banks are rated a buy, up 11% on the figure at the start of last year and 15% since the Spitzer settlement, according to research by Financial News. In January 2003, just months after the settlement with the New York state attorney-general, the proportion of buys stood at 36.4%. The rise in buy ratings is mirrored by a similiarly alarming drop in sell recommendations, which have fallen nearly 13% since January 2005 to just 12.5% of all research recommendations. In January 2003, sell recommendations accounted for 18% of all calls by analysts. Since the beginning of 2003, the S&P 500 is up 49% and the Dow Jones Industrial Average, which last week set a new high, is up 38%. However, analysts are now more bullish on more stocks after this run than they were before it. While the number of buys is well down on the peak of 69% in 2000, managers of research departments are frustrated by the rise from their analysts. The head of European equity research at one US bank, said: "We are fighting a constant battle against the rise in buy recommendations, but analysts still have a strong predisposition towards them. It's a problem every bank faces, but it is clearly something we need to do better." Another head of research at a US firm has gone so far as to give one of his teams, which had buys on 50% of the companies it covered, two weeks to get the proportion down to a "sensible" level. Of the 10 banks in the sample, all except Deutsche Bank have increased the proportion of buy ratings on the stocks they cover and reduced the percentage of stocks they rate a sell. Banks are also more bullish than any time in the past four years on their investment banking clients and are still showing a bias in their recommendations. The proportion of buy recommendations on clients at the start of October stood at 46.1%, compared with 41.8% on all stocks. This is up by nearly three percentage points on January 2003. Banks are also less likely to rate their clients a sell – just 11.8%, down from 16.2% at the start of 2003. UBS is the most bullish of all, with 48% of its 3,000 stock recommendations rated a buy, according to disclosure in its research reports, up from 41% at the beginning of last year. UBS rates just 7% of its stocks a sell. Citigroup and Bear Stearns are the next most bullish on 46%. Some four years after the Spitzer settlement over conflicts of interest, a client of an investment bank is on average 10% more likely to receive a buy rating than other stocks covered by it. However, banks are less biased towards clients than they used to be. In January 2003, a client was 19% more likely to have a buy recommendation than a non-client. Lehman Brothers is the most optimistic bank on its clients, rating 55% of them a buy against 44% of all stocks it covers. One research manager, said: "Our ratings are not influenced by the corporate finance department, however it obviously causes political problems every time you put a sell recommendation on a company, whether or not they're a client."