Published November 22, 2024
This time each year, investment houses trot out their outlooks for the following year. Below are observations about market forecasts from a couple of firms that wade through many of these forecasts. First up is Delta Research, followed by Blake Millard’s observations.
“Forecasting accuracy has been poor throughout market history. In 1999 and 2007, valuation was elevated but analysts predicted stock market appreciation based on continued growth. The same was true in 1972 with the “Nifty Fifty.” In 1929, Irving Fisher declared nine days ahead of the market crash that the stock market had achieved a “permanently high plateau.” The market suffered from significant declines (~50% drawdowns) following 1929, 1972, 1999 and 2007.
The most straightforward institutional S&P 500 forecasts for 2025 say stock valuation will follow earnings growth. Earnings are expected to be up 10% year-over-year. The major investment banks are forecasting the S&P 500 to appreciate by about 7-10%.
The current forward 12-month Price/Earnings (P/E) multiple of the S&P 500 is about 22x. The 30-year average is roughly 17x. Because of the elevated valuation currently, strategists do not believe the S&P 500 will enjoy P/E multiple expansion. Because the Federal Reserve is signaling it will be lowering interest rates, strategists are not projecting P/E multiple contraction.
What was unusual about 2024 was the lack of volatility. What is likely to return in 2025 is normalized volatility with the S&P 500 having a realized standard deviation of +/- 15%. The return of volatility may primarily be the result of high valuation and a willingness by investors to capture profits after a long bull run and with valuations elevated. High valuation markets can be temperamental/twitchy when uncertainty spikes.”
And Blake Millard’s observations:
“Many, many, maannnyyyy years ago, John Pierpont Morgan was asked by an investor what the stock market would do next.
He candidly responded: “It will fluctuate.”
And that’s the best answer any investor with experience could possibly entertain.
End of year price targets?
A hilarious exercise in futility, and yet here we are. We’ve punched our ticket, eagerly awaiting our turn to find out what’s next.
This is the time of year (again) when Wall Street strategists roll out their projections for the coming year.
Did you see how Wall Street came into 2023?
The consensus target called for an outright fall in the stock market in 2023, the first time this century they had predicted a loss.
It turned out to be one of the greatest years on record. The S&P 500 returned +26.29% in 2023.
Even at the midpoint of 2023, there was a ~50% difference between the most bullish year-end S&P 500 target (Fundstrat’s Tom Lee saw it rising nearly +10% higher to 4,825) and the most bearish call (Piper Sandler had stocks down some -27% to 3,225).
In hindsight, that was a difficult market to call with any level of conviction.
What about 2024? Surely they updated their models.
Wall Street consensus predicted a meager +2% upside move.
Ed Yardeni was at the top end with a 5400 year-end target (+13% upside), while the bears over at J.P. Morgan called for 4200 at the low end of the range (-12% downside).
Today, the S&P 500 closed at 5917 – higher than all of them.
The 2024 economy has proved far more resilient than most expected at the beginning of the year. In fact, stock markets outran the best of them.
The point here isn’t to beat up on the Wall Street strategists.
Quite the contrary.
These men and women are tasked by management and boards to put out forecasts because the bank can then sell it to their institutional clients. These folks produce evidence-based research grounded in historical data and interpreted through robust multi-factor models. Many of these people are off-the-charts intelligent. But, you share a bourbon or three with them, and they’ll share their disdain for these outlooks.
The purpose of this message is to exert caution.
The historical track record of Wall Street strategists correctly forecasting the market 12 months in advance is not great. In fact, they’re more often wrong than right.
In particular, never trust the outfits who hug the bogey 7-10% average return because we know the market rarely produces the long-term average return in any particular calendar year.
Even Wall Street knows how futile this whole exercise is.
Back in July, the revered Piper Sandler announced it would no longer publish an S&P 500 price target.
“Having target prices on individual stocks makes sense, but makes less sense nowadays for the index,” wrote Chief Investment Strategist Michael Kantrowitz. “The market no longer represents the stocks in the market.”
Kantro published an accompanying chart showing almost no correlation between what the S&P 500 is doing and what individual stocks are doing.
And here is the prodigious Sam Ro of TKer who hit it right on the nose:
“I’d caution against putting too much weight into one-year targets. It’s extremely difficult to predict short-term moves in the market with any accuracy. Few on Wall Street have ever been able to do this successfully. I do however think the research, analysis, and commentary behind these forecasts can be informative.”
Investment errors occur by acting on short-term forecasts.”
Over the coming month, we will provide some of the published market outlooks. Of course, we are quantitative model-driven investors for whom these outlooks carry no weight. They only serve as interesting reading and a window into what major investment firms are thinking.
Market Update
Stocks kicked off the week on a positive note with a +0.5% gain. Electric vehicle company Tesla continued its post-election surge on speculation the incoming Trump Administration will develop a self-driving “framework” that will benefit the company’s robotaxi effort. Nvidia popped +5% ahead of Wednesday’s earnings report. Walmart added +3% as the company lifted its full-year outlook. The Nasdaq rose +1%. Stocks traded flat Wednesday ahead of AI leader Nvidia’s earnings, released after the close. Nvidia’s earnings met lofty expectations but the stock failed to respond positively dipping -0.5%. The Justice Department’s lawsuit against Google parent Alphabet sent the company’s stock down -5% weighing down the Nasdaq Thursday. The S&P 500 rose +0.5% as strength in IBM and Salesforce supported the index. Financial stocks added to their strong month of November with solid gains Friday. The group lifted small and midcap shares while interest rates held steady this week, providing investors with some relief after a an eight-week rally. The Dow Industrials continued their recent run with a +1% gain Friday. The index is more heavily weighted in financial shares than the S&P 500.
Stocks rebounded from last week’s pullback with the S&P 500 rising +1.67%. The Nasdaq 100 (QQQ) recovered +1.86%. Small cap stocks rode strength in financials and a halt in the interest rate rally to zip higher by +4.50%.
Warm wishes and until next week.