“The need for certainty is the greatest disease the mind faces.” – Morgan Housel, from his new book, “Same as Ever.”
The holiday season is upon us. A time to reflect, spend time with friends & family, and (hopefully) unplug.
It’s also when our friends in fancy office spaces and slick suits are polishing up their crystal balls to tell us what happens next.
The only problem is their track record is dismal.
Buckle up, buttercup. This is our 7th edition of “Tis the Season for Wall Street Forecasting ” series (check out 2023 and 2022).
Why would anyone pay attention to Wall Street if they are wrong year after year?
It seems humans don’t care about right and wrong. We crave certainty. If someone provides an illusion of certainty, we tend to feel safe and protected (even if that person or institution is full of hot air).
Let’s see how our brash friends’ 2023 forecasts held up. These predictions were made in December 2022.
Consensus Wall Street Prediction for the S&P 500 in 2023
Wall Street’s S&P 500 price target 4,060 (simple average)
Actual S&P 500 index level 4,645 (as of 12/13/23)
Wall Street only missed by 15%. I say “only” because their 2022 S&P 500 forecast was off by a whopping 23.5%!
The most accurate forecast came from Deutsche Bank – S&P 500 price target of 4,500.
The most inaccurate forecast came from Barclays S&P 500 price target of 3,675. Yikes!
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Undeterred by their lack of accuracy, Wall Street is publishing 2024 S&P 500 predictions (the below list goes from pessimistic to optimistic S&P 500 price targets)…
BCA Research: 3,300
JPMorgan: 4,200
Morgan Stanley: 4,500
Stifel: 4,650
Goldman Sachs: 4,700
Ned Davis Research: 4,900
Bank of America: 5,000
RBC: 5,000
Federated Hermes: 5,000
Deutsche Bank: 5,100
BMO: 5,100
Fundstrat: 5,200
Oppenheimer: 5,200
Yardeni Research: 5,400
Source: Business Insider
The simple average of the above forecasts for the S&P 500 price level for 2024 is ~4,800, which equates to a ~4.4% price return from current levels (not including dividends).
The most pessimistic forecast comes from BCA Research which calls for a 2024 return of -28% for the S&P 500 in 2024.
The most optimistic forecast comes from Yardeni Research which calls for a 2024 return of 17% for the S&P 500 in 2024.
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One might say, you’re being awfully harsh Nik. What’s wrong with making a prediction about what the market does?
- Investors end up clinging to the forecast that best fits their personal narrative. For example, a pessimistic investor will seek out a pessimistic forecast as validation that their thesis is correct.
- In the digital age, every person has a microphone through social channels. Often, the most outlandish forecast gets the most attention. Pessimism sounds sophisticated and smart. Optimism sounds aloof and boring.
- There’s no penalty for being wrong. No one is keeping score. No one is accountable for the predictions made. A person could be wrong for 20 years in a row and still come off as an expert.
- Wall Street seldom sticks to their original forecast. It’s standard practice to change a forecast based on market action. For example, if a bank predicted a bad year for the market and stocks race out to a hot start (like 2023), it’s common practice to revise the original prediction higher mid-year.
- Sentiment tends to follow price. For example, after a bad year (2022), the predictions for the following year are often pessimistic. Following a great year, Wall Street assumes the party will keep going and the next year will be positive. It’s an exercise in the human tendency to over-weight what just happened (also known as recency bias).
In my opinion, the biggest problem with playing the predication game is that it conditions the wrong behavior. Playing the market oracle based on short-term market narratives is a recipe for disaster. Ideally, you would want a portfolio that can stand the test of time regardless of what happens. I like to say positioning beats predicting.
My advice is not to ignore Wall Street forecasts, market research, or commentary. Rather, take it with a grain of salt. Think of it as entertainment or an intellectually stimulating exercise. If a financial professional tells you what happens next, run the other way.
In a perfect world, any prediction about the future should come with a warning label; “For entertainment purposes only, not actionable investment advice.”
Pure Portfolios is proud to be forecast free since 2016.
For further reading, check out “Wall Street is Bearish: That’s a Good Thing.” Wall Street experts were extremely bearish heading into November 2023. The market went on to have its best month in years. You can’t make this stuff up!
Shoot us a note at insight@pureportfolios.com