Wall Street Forecasts: Popular, But Not Very Helpful
Since time immemorial, people have been trying to get a glimpse into the future. No group is more interested in forecasts than the financial industry.
As we come close to the end of 2024, many investors are looking towards forecasts for 2025 and what next year might bring for markets. If you are relying on Wall Street predictions and analyst reports to make investment decisions, it might be useful to review their track record.
At 5,823 (as of 29 Oct 2024), the S&P 500 is more than 600 points above the highest 2024 year-end price target (5,200) forecasted by Wall Street Strategist and close to 20% above the average forecast (4,833).
How is it that investment “experts” underestimated the market performance in 2024 by such a large magnitude?
A report from CNN shows that over the two decades (2002-2021), analysts overestimated the final value of the S&P 500 in 13 of those 20 years and underestimated the final value in the other 7 years.
Forecasters missed their forecast by one of the largest margins in 2022, overshooting by nearly 40%.
A paper published by a group of professors and researchers studying 6,627 forecasts made by 68 forecasters found that overall, the accuracy of forecasts as a group was no different from the random chance of a coin flip, with an accuracy rating of 48%. Another study came to similar conclusions following well-known stock market “experts” such as Jim Cramer, a fixture on CNBC and Abbey Joseph Cohen, former partner and chief U.S. investment strategist at Goldman Sachs.
Recently, Goldman Sachs Predicts Sluggish S&P 500 Growth Over Next Decade, Warns of Lower Return. If history is any guide, don’t let it affect you and take it with a grain of salt. Most importantly, don’t make unnecessary changes to your investments based on a forecast. Remember the sage advice by the Oracle of Omaha,
‘… the only value of stock forecasters is to make fortune tellers look good.’
— Warren Buffet, 1992 letter to shareholders
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