Stock research is no longer in demand, Wall Street sell-side analyst compensation has sharply decreased by 30%

In recent years, the Wall Street equity research analysis industry has faced unprecedented shocks.

On January 9, Bloomberg reported that the number of equity analysts at the world's 15 largest banks has plummeted from nearly 4,600 a decade ago to about 3,000, a decline of over 30%.

At the same time, analyst salary levels have also significantly decreased. Data from Vali Analytics shows that the starting salary for entry-level equity analysts is currently between $110,000 and $170,000 per year, nearly on par with pre-financial crisis salaries—considering inflation, the total compensation for equity analysts has actually fallen by nearly one-third.

Analysts point to four main reasons for the decline of the equity research analysis industry:

1. Regulatory policy changes: The MiFID II regulations implemented in 2018 require asset management companies in the UK and EU to pay for research reports provided by brokers; two years ago, U.S. brokers providing research to European managers were also subject to this rule;
2. Rise of passive investing: Investors are increasingly favoring low-cost passive investment strategies such as ETFs;
3. Development of artificial intelligence: Advances in AI technology threaten traditional analysts' jobs, as JP Morgan has already been experimenting with AI analyst chatbots;
4. Decrease in the number of publicly listed companies: The shrinking number of publicly listed companies has also reduced the demand for analysts from investors.

As the industry declines, the U.S. stock market has also undergone a series of changes—the coverage of small-cap stocks has decreased, and the market is increasingly focused on large-cap stocks. Bloomberg points out that currently, the number of companies in the Russell 2000 index covered by fewer than 10 analysts has surged from 880 a decade ago to about 1,500, an increase of 70%; on the other hand, about 97% of companies in the S&P 500 index have 10 or more ratings, far exceeding the approximately 66% in 2014.

However, multiple academic studies indicate that the decline in analyst coverage can lead to inaccurate valuations of companies by investors, thereby increasing companies' financing costs, reducing stock liquidity, and affecting market efficiency. Research by Jefferies strategist Steven DeSanctis shows that since 2001, small-cap stocks with no coverage have lagged behind companies with more than 10 analysts covering them by nearly 3 percentage points on average each year.

As for many practitioners, facing industry changes, they have chosen to transition, such as moving to social media, joining hedge funds, shifting to investor relations departments, founding independent research platforms, and launching paid subscription columns.

Jerry Diao, an analyst responsible for Silicon Valley tech stock research at a large bank, shares financial industry advice on YouTube and currently has 40,000 followers; another analyst, Alex Morris, founded the research firm TSOH Investment Research, with an annual income of about $260,000; Wall Street strategist Barry Knapp has launched a paid subscription column on Substack, charging each subscriber $999 per year Bloomberg reported that in the future, the stock research and analysis industry is expected to further integrate with AI, for example, former Citigroup chief strategist Robert Buckland has joined the AI startup EngineAI, focusing on applying AI to stock research