The only real purpose stock forecasts serve is to shed light on how forecasters themselves are feeling, which one might consider a proxy for investor sentiment at the institutional level. Traders work on the floor of the New York Stock Exchange on June 2, 2023.Michael M. Santiago/Getty Images
Every new year, investing’s greatest visionaries exercise their powers by predicting exactly where the stock market will be at the end of the year.
The annual procession of forecasts comes courtesy of some of the highest-paid strategists in the business from the major brokerages and investment banks.
Of course, everyone knows the stock market is unpredictable. But the Wall Street brain trust must be capable of foreseeing something worthwhile in the year ahead. Right?
Not really. Not only does the average market call tend to be comically out of bounds. But also consider the wide range of outcomes imagined at the outset of each calendar year. That, too, has proven to be next to useless.
There are 15-plus strategist targets that get compiled each year from the likes of Goldman Sachs, Morgan Stanley and RBC Capital Markets.
A year ago, the predictions from this group for how the S&P 500 index would perform in 2024 ranged from a loss of 12 per cent to a gain of 15 per cent. The index ended the year up by 23 per cent – much better than even the Street’s most bullish forecast.
It was a similar story in 2023. The rosiest prediction going into the year called for an increase of 17 per cent in U.S. stock. The S&P 500 ended the year on a 24-per-cent gain.
Granted, those were two extraordinary years. Not since the dot-com boom of the late 1990s has the U.S. stock market clocked such blockbuster years back-to-back.
But the practice of stock market prognostication is just as inept over longer time frames.
A couple of years ago, Vanguard Group looked at the reliability of market forecasts since the end of 2010. The analysis found that 75 per cent of the time one-year returns were either higher than the most optimistic forecast, or lower than the most pessimistic.
“Meaningless and futile are the most charitable descriptions I can apply to such forecasts,” Vanguard strategist Kevin DiCiurcio wrote.
The only real purpose these forecasts serve is to shed light on how forecasters themselves are feeling, which one might consider a proxy for investor sentiment at the institutional level.
But that’s not why big bold market calls get so much attention. Investors are looking for an edge. Unfortunately, they won’t find one in the industry consensus.
Bespoke Investment Group recently calculated that the average yearly forecast since 2000 was off from actual stock market results by an enormous margin – 14.2 percentage points.
How could some of the sharpest minds in the business be so wrong, so consistently?
The big problem lies in trying to make short-term predictions. The stock market is chaos. The shorter the time frame, the less predictable it is.
Over the past 100 years, the S&P 500 has posted an average annual price gain of around 9 per cent. Over very long periods, the gyrations of the market smooth out into a fairly predictable trajectory.
There’s no telling that the next century in stocks will align with the past century. But 9-per-cent a year appears to be a durable result over very long investment horizons. The same goes for the Canadian stock market.
It’s a different story for any given calendar year, where average outcomes are the exception and outliers are more common than you might think.
The 9-per-cent long-term average return almost never materializes in a single year. In just four of the last 100 years, the S&P 500 has posted a return of between 8 and 10 per cent. There were more than twice as many years with gains of 30 per cent or higher. Nearly one-third of the time the index rose by at least 20 per cent.
Even losses of 20 per cent are more common in the stock market than an average year of around 9 per cent. Of course, the industry never expects the market to fall. Individual strategists may forecast a loss, but the consensus never does. This backfires in terrible years, such as 2008, when the S&P 500 declined by 38 per cent.
There’s no crystal ball in investing. Even if there were, it probably wouldn’t help you.
A few months ago, Elm Partners published the results of an experiment it called the Crystal Ball Challenge. Participants who had financial training were given $50 and a copy of the front page of the Wall Street Journal 36 hours in advance. Their goal was to turn that prescience into profits by trading stocks and bonds.
They didn’t do well. About half lost money, while one in six went bust. They generally failed to correctly guess the direction of market moves and they overestimated the significance of the news they got in advance, the authors wrote.
For what it’s worth, the median forecast projects that the S&P 500 will gain about 12 per cent in 2025, according to top strategists. They may be right, but I wouldn’t put money on it.