When the Crystal Ball Is a Little Cloudy
Analysts’ market forecasts are often far off. Since markets reflect expectations and surprises are unknowable, forecasts are best treated as entertainment.
This is a fun time of year. We have the holidays right around the corner. (I’m already on my fourth viewing of Christmas Vacation.) Football games are ratcheting up in intensity. And a new round of equity analysts’ forecasts for the stock market’s future arrives. If previous forecasts are any indicator, you might want to use these for entertainment only.
Bloomberg provides year-end price return predictions for the S&P 500 Index sourced from a number of equity analysts. The gap between the forecasts and actual index returns over the past several years has been consistently vast. The most accurate forecaster averaged an 18.6% absolute difference between prediction and reality. Many of the individual yearly predictions were well over 20% off the mark.
This is not to poke fun at market analysts but rather to highlight the challenge of predicting where markets will go. Market prices reflect an expected return demanded by market participants based on current expectations of the future. But actual returns include an unexpected component driven by future events that are by definition unknowable today. It’s best to view these forecasts as entertainment. Or ignore them and get back to watching the Griswold family shenanigans.
EXHIBIT 1
Absolute Difference Between Equity Analyst Forecasts and Actual S&P Index Calendar-Year Price Returns
Glossary
Expected return: An estimate of average anticipated returns informed by historical data.
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