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Wall Street forecasters are still a remarkably optimistic lot despite plunging share prices and recession forecasts that have become as common as long-weekend hotdogs.

On average, top strategists predict the S&P 500 index will finish 2022 at 4,482, according to a report by Aneet Chachra, a portfolio manager at the British-American fund company Janus Henderson. If these strategists are right, U.S. stocks are poised to jump 18 per cent above where they closed Thursday.

This would be surprising, to say the least. For one thing, the S&P suffered its worst first half since 1970 during the past six months.

For another, stock market gains of the magnitude the strategists are predicting just don’t happen that often.

Between 1928 and 2022, the probability of the S&P 500 gaining 18 per cent or more over a six-month time span was only around 10 per cent. So, Mr. Chachra says, strategists seem to be implicitly calling for a rare event. They are predicting a stock market surge over the next six months that would be in line with what has occurred only about one in 10 times in the past.

Granted, the historical probability of an 18-per-cent or greater rebound improves if you look only at six-month periods that followed previous half years in which stocks sank 20 per cent or more. Still, even then, the chance of a big bounce back was only around 26 per cent – roughly a one-in-four outcome.

S&P 500 Strategist Estimates for the End of 2022

FirmS&P 500 Forecast
(year-end 2022)
S&P 500 Forecast
(year-end 2022,
as of March 31, 2022)
S&P 500 Forecast
(year-end 2022,
as of June 30, 2022)
(in alphabetical order)
Bank of America4,6004,6004,500
Barclays4,8004,5004,500
BMO5,3005,3004,800
BNP Paribas5,1004,9004,400
Cantor Fitzgerald4,8004,8003,900
Citigroup4,9004,7004,200
Cornerstone Macro / Piper Sandler*4,6004,8004,000
Credit Suisse5,0005,2004,900
Goldman Sachs5,1004,7004,300
Jefferies5,0005,0004,650
JPMorgan5,0504,9004,800
Morgan Stanley4,4004,4003,900
RBC Capital Markets5,0505,0504,700
Scotiabank4,8005,0004,600
UBS4,8504,8504,850
Wells Fargo5,2004,7154,715
Average 2022 Forecast (points)4,9094,8384,482
2022 Forecast Standard Deviation (%)4.90%5.00%7.50%

Source: Bloomberg, Research Reports, as of 30 June 2022. Industry estimates are hypothetical in nature, do not reflect actual investments and are not guarantees of future results. 

*Cornerstone Macro was acquired by Piper Sandler in February 2022.

Given these daunting odds, “the average strategist forecast appears quite optimistic,” Mr. Chachra drily observes.

He doesn’t speculate in his report about what is driving this optimism, but investors may want to ponder a couple of theories.

The cynic’s take is that strategists’ forecasts are marketing exercises that bear about as much relation to reality as the latest episode of Stranger Things.

Strategists, as a rule, are paid for peddling sunlight, not gloom. Perhaps the sane thing to do is simply to ignore their forecasts. After all, they didn’t foresee the plunge in share prices over the first half of the year, so why should we trust them now?

A second and more tolerant theory is that strategists are essentially saying that investors are so downcast that any glimmer of good news could send stocks spiralling higher.

This seems somewhat reasonable. Readings of investor sentiment show most people are braced for tough times ahead. Any evidence that inflation is waning and economic conditions are improving could potentially spur a stock-market rebound.

In one optimistic scenario, central banks could decide that the economy has slowed enough. If so, they might rein back the vigorous increases in interest rates they have signalled. Stocks would presumably bounce higher in response.

This is not an entirely loony proposition. Roberto Perli, head of global policy at investment bank Piper Sandler, noted this week that the bond market appears to be forecasting that the Federal Reserve will start chopping interest rates in 2023. This would make sense if interest rates rise over the next few months, the U.S. economy lurches into a recession and policy makers decide enough is enough.

Still, it seems rather hopeful to think we will have a downturn, a change of heart at the Fed and a stock-market rebound, all over the next six months. Investors shouldn’t rule out the prospect of a vigorous market bounce, but they should take strategists’ year-end targets with a large grain of salt.

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