The S&P 500 index could have a strong year with a gain of just under 15 per cent from current levels by the end of 2024, according to Yardeni Research. Then again, ask JPMorgan and it says a drop of almost 11 per cent from here is possible.
That’s a spread of 26 percentage points between the top and bottom of the range from a veritable who’s who of Wall Street firms, including Goldman Sachs, Morgan Stanley, Deutsche Bank and others that recently had their forecasts published on MarketWatch.com.
Is there any evidence that these one-year forecasts from the pros have value to investors? Why are they so wildly different? And what are investors supposed to do with this information?
I looked at 10 different firms’ one-year forecasts for the S&P 500 over the past 10 years and found that every single one of them missed the mark by more than 10 percentage points per year, on average.
But I’m far from the only person who’s looked up the past performance of professional forecasters. According to a FactSet report, for the 20-year period of 2002 to 2021, the average S&P 500 calendar year-end price estimates, based on bottom-up stock forecasts, were off by an annual average of 8.3 percentage points.
In this study, the year-end S&P 500 price was derived by looking at the price targets for individual stocks that make up the S&P 500 from reporting analysts. Another study that looked at analyst accuracy from 41 countries around the world showed that Canadian analysts fared in line with U.S.-based analysts.
The poor track records of predicting one-year price levels for stock markets are actually a well-known secret in the industry. So, are the world’s best market strategists obligated to look publicly silly?
You could argue that they are. The divisions of the firms that put out these targets are on the sell side of the Street – which means they are in the business of selling their services to mutual funds, pension funds, private family offices and other investors, in addition to building brand awareness.
If they just say the same thing as the next firm, they aren’t going to stand out from the crowd. So there is an incentive to make bold calls.
Get it wrong and everyone forgets about it, because they know the track records are awful anyway. But there is also a professional playbook for deflecting blame that you’ll see once you know to look.
The top three excuses: 1. We were just early. Wait and see. 2. An unexpected event occurred during the year that wasn’t in our model. 3. We were wrong for the right reasons. (Here’s a more comprehensive guide to blame deflection for incorrect forecasting.)
But if you nail a forecast you can attain legendary status, especially for a downside prediction. Michael Burry’s call on the housing market leading up to the Great Financial Crisis in 2008 and 2009, featured in the Michael Lewis book and movie, The Big Short, still has people reading into any hint of a market call he might make 15 years later. Those same people likely could not tell you his track record since 2008.
Somewhat paradoxically, many of the sell-side strategists work for firms that have a buy side as well. In other words, each of the firms has an asset management arm that stewards clients’ investments. It’s quite common for them to advise their clients to ignore the short-term noise and focus on the long term instead.
As Wall Street’s crystal balls continue to cloud with contradiction, a well-diversified portfolio appropriately matched to your risk profile and goals is the best prescription for success, not short-term market timing decisions based on historically inaccurate market forecasts.
Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.
Preet Banerjee