About market analysts and their forecasts
2022.12.08 13:52
About market analysts and their forecasts
Budrigannews.com – When Yogi Berra famously stated that it’s hard to predict the future, he probably did not mean financial market analysts.
However, the tumultuous events of 2022 demonstrated that the famous baseball player’s malapropism, which was also used in similar ways by others, probably applies equally to predicting the future of stocks, bonds, and currencies.
Analysts on Wall Street are well-known for their optimism. Some might suggest that it is because their employers receive investment banking fees from the company’s constituents and that being bullish is more effective at generating business.
Additionally, since stock markets typically rise, down years are always unexpected. However, this is precisely where clients can reasonably anticipate that their well-paid investment bank and fund management professionals will earn their corn.
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Crashes are difficult to predict, but typically occur as a result of a gradual accumulation of financial imbalances, rising interest rates, or particular triggers: Lehman, the dotcom bust, the 1970s oil shocks, and the Great Depression.
Black Monday in October 1987 and the pandemic plunge in March 2020, two of the largest crashes ever recorded, do not even appear on the annual scorecard and are ultimately included in “up” years. The ability of equity investors to recover is strong.
They are also optimistic, which may explain why analysts almost always predict a successful year ahead. There was no exception this year.
On December 1, 2021, a Reuters poll of 45 analysts revealed that the median S&P 500 end-2022 forecast was 4910 points, or a 7.5 percent increase at the time of publication.
The median expected increase in earnings was just under 8%.
The S&P 500 is currently below 4000, down 17% year to date, and on track for one of its largest declines in 80 years. Earnings growth is expected to be negative in the fourth quarter.
Certainly, nobody could have anticipated Russia’s February invasion of Ukraine, the unleashed chaos on the commodity and energy markets, or the explosion of global inflation. Obviously, stocks and risk assets suffered greatly as a result.
However, at this time last year, price pressures were already a clear and present threat due to the congestion of global supply chains and the declarations of Fed Chair Jerome Powell and Treasury Secretary Janet Yellen that inflation was no longer “transitory.”
Wall Street’s confidence, or perhaps arrogance, persisted even after Russia’s invasion of Ukraine on February 24 brought war to Europe’s doorstep. At the end of May, a poll conducted by Reuters revealed that the S&P 500’s median end-2022 forecast was 4400 points, representing a gain of 11.7% at the time.
Because of the nature of the game of macro and market forecasting, you should hope that enough of your peers also make mistakes. This is certainly what transpired this year.
ETR: Deutsche Bank Only 19% of the 750 respondents to the bank’s year-end 2021 survey, the majority of whom were customers, anticipated a negative return for the S&P 500 this year, and only 3% predicted a decline of more than 15%, according to Jim Reid on Wednesday.
Even though respondents correctly identified “an aggressive Fed tightening cycle” and “higher-than-expected inflation” as the two most significant risks for 2022.
However, even back then, only 2% of respondents thought U.S. consumer price inflation would exceed 7% by the end of the year, and the median estimate for a rate hike was 50 basis points. This shows how powerful inflation and the Fed’s response would be.
Even more skewed were their predictions for the U.S. bond market: only two percent of respondents thought it would end this year above 3%, and only four people thought it would be above 3.5 percent. Currently, it is 3.48%.
Reid jokingly wrote in a note on Wednesday, “If you were any of those four people out of 750, please email me to tell me your predictions for the next 12 months.”
Yet again nobody understands what 2023 holds except for the overall viewpoint for Money Road is really splendid. The S&P 500 will finish the year at 4200, up 6.8% from Wednesday’s close, according to a poll of 41 strategists conducted by Reuters and released on Nov. 29.
Citi analysts, on the other hand, believe that the consensus is overly optimistic, with current stock market pricing implying earnings growth of around 4% in 2019.
They point out that earnings have fallen by 28% on average during recessions in the past half century, implying that one is coming. Beware of bulls.
