As we near the finish line for 2024 the number of notable economic data releases and other market-moving events will wane. With airtime to fill, the financial media will increasingly look to 2025 for content. A tried-and-true approach to accomplish this is to interview research analysts, economists, and market strategists about what they think will happen in the stock market during the coming year. 

I don’t blame the media for pumping out this type of content, there is substantial demand for it. Investors hate uncertainty. A market forecast provides a roadmap for the coming journey. Even if the forecast points to a tough road ahead, there is comfort and a sense of control when people believe they know how things will unfold. To actually add value, however, a forecast must accurately reflect how the future will unfold. So, are market forecasts accurate?

The chart below, recently published by Avantis Investors, can help to answer the question. It illustrates the consensus forecast for the S&P 500 relative to the actual return each year going back to 2018. The result of the comparison does not inspire confidence. The average gap between the forecast return and the actual return has been a whopping 17.9% over the last six years!

Data from 1/1/2018 - 11/30/2024. Sources: Emily McCormick, “What Wall Street Strategists Forecast for the S&P 500 in 2019,” Yahoo Finance, December 31, 2018; Jeff Sommer, “Clueless About 2020, Wall Street Forecasters Are at It Again for 2021,” New York Times, December 18, 2020; Jeff Sommer, “Forget Stock Predictions for Next Year. Focus on the Next Decade,” New York Times, December 16, 2022; Senad Karaahmetovic, “Top Wall Street Strategists Give Their S&P 500 Forecasts for 2023,” Investing.com, December 27, 2022; and Tom Aspray, “Should You Worry That Strategists Keep Raising Their S&P 500 Targets?” Forbes, October 20, 2024. Past performance is no guarantee of future results.

YTD 2024 ranks as one of the least accurate periods. Through November, the consensus forecast for this year missed the mark by a laughable 24.3%. Had these market strategists abandoned their attempts at forecasting and simply used the long-term historical return for the S&P 500 of 10.1% instead, they would have improved the overall accuracy of their estimates. The average gap between forecast return and actual return would have declined from 17.9% to 16.1%!

While the consensus estimates have widely missed the mark, there is typically a small handful that gets a market call correct each year. This is not surprising given the large number of individuals attempting a guess. The problem is that there is no consistency from one year to the next for who is getting the call correct. Therefore, you can’t tell whose view you should pay attention to. 

Despite their abysmal track record, the individuals making these forecasts are intelligent people. Many of them work for the big Wall Street banks, investment managers, and research firms. They are highly educated, highly paid, and have tremendous resources at their disposal. They are extremely knowledgeable about the markets and the economy. They (usually) make sound, logical arguments supported by good data and analysis. Importantly, they are good storytellers, painting visions of the future that sound highly plausible. It’s not surprising that their forecasts continue to garner so much attention. It may be fiction, but it can still be entertaining.

At the end of the day, forecasting is doomed to fail because the market and the economy are too large and too complex to accurately model. Nobody interviewed by CNBC, Bloomberg, The Wall Street Journal, or any other media outlet in 2024 knows what is going to happen in 2025. There’s nothing wrong with consuming that content, just don’t let it influence your investment decisions. 

Source: MarketWatch

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