Highly rated stocks are underperforming their lower-rated rivals by a substantial margin

Highly rated stocks are struggling, while low-rated names outperform.

The thrashing that Wall Street's artificial-intelligence darlings have taken over the past few months has led to an unusual situation in the U.S. stock market

Wall Street's favorite stocks - that is, the stocks with the highest percentage of buy ratings from professional analysts - are being badly beaten by the most hated names, or those with the lowest share of buy ratings.

Michael Kantrowitz, chief investment strategist at Piper Sandler, noted the trend in recent commentary shared with MarketWatch. Over the past year, the rolling underperformance of Wall Street's highest-rated stocks ranked among the three most extreme examples seen since the mid-1990s. Kantrowitz measured relative performance by pitting the highest-rated stocks in each of the 11 sectors against their lowest-rated names.

Periods in which Wall Street's favorite stocks underperform so dramatically are rare, and they typically occur when the backdrop for corporate earnings, or the broader economy, is beginning to shift, Kantrowitz and his team said.

In October 2000, after a summer rally spurred by Federal Reserve easing, Wall Street's darlings faltered as investors faced up to the fact that the dot-com bubble was deflating.

By February 2009, with the global economy bottoming out in the wake of the financial crisis, beaten-down and low-rated cyclical stocks staged a massive rebound that left top-rated names behind. Fast-forward to October 2020, and the expectation that the first COVID-19 vaccines would soon be approved sparked a massive economic-reopening trade.

The list of the sell side's top 10 most favored names was dominated by stocks in the information technology and communication services sectors. Arista Networks (ANET), a cloud networking company, and EchoStar (ECHO), a telecommunications and satellite communications provider, were the two most highly rated stocks, with more than 87% of analysts rating them a buy.

At the other end, Prudential Financial (PRU) and T. Rowe Price Group (TROW) topped the list of least favorite names, with no analysts rating them a buy, according to Piper Sandler.

-Joseph Adinolfi