BY RYAN GAVIN, CFA PORTFOLIO MANAGER
As we begin a new year, many investors are reflecting on market forecasts for the one ahead. Predictions from economists, banks, and asset managers about how the S&P 500 will finish the new year often grab headlines. How accurate are these forecasts, and what do they tell us about investing strategies?
A closer look at past predictions offers an interesting lesson. At the end of 2023, 20 firms issued year-end 2024 price targets for the S&P 500. Their estimates varied widely, with the highest being a 13% rise and the lowest a 12% decline. Yet, as of November 2024, the index had risen by 26%, exceeding even the most optimistic prediction. The closest estimate undershot the actual return by over 10 percentage points, while the most pessimistic missed by nearly 40 percentage points.
This isn’t an isolated phenomenon. Examining consensus estimates over the past seven years reveals a persistent pattern of inaccuracy. Consensus predictions have never been within 10 percentage points of the S&P 500’s actual annual return. For instance, they have underestimated it by as much as 26 percentage points and overestimated it by up to 21 percentage points.2 This track record highlights the challenges inherent in forecasting market movements and the risks of relying on these predictions for investment decisions.
Forecasts offer a sense of control in the face of uncertainty, promising clarity in an unpredictable world. They appeal to our desire to believe that experts can see what lies ahead, even when the evidence suggests otherwise. This bias toward prediction can lead investors to overvalue forecasts and underestimate the complexity of markets.
The risks of market timing become apparent when considering the potential consequences of acting on forecasts. Investors who sold their holdings based on pessimistic predictions at the end of 2023 missed out on the substantial gains of 2024. Missing even a few periods of strong performance can significantly impact long-term returns, making market timing a perilous strategy.
Fortunately, successful investing doesn’t require short-term market predictions. Instead, investors can focus on time-tested principles: maintaining a disciplined approach, adhering to well-diversified asset allocation aligned with their goals and risk tolerance, and avoiding impulsive decisions based on market noise. Over the long term, such strategies have demonstrated a strong track record of delivering positive outcomes.
In conclusion, while market forecasts may capture our attention, they’re no substitute for a sound, long-term investment plan. By resisting the temptation to time markets or react to predictions, investors can position themselves for enduring success in the face of uncertainty.
Data as of 11/29/2023. Sources: Avantis Investors, “ETF Monthly Field Guide,” December 2024; Tom Aspray, “Should You Worry That Strategists Keep Raising Their S&P 500 Targets?” Forbes, October 20, 2024. Data from 1/1/2018 – 11/30/2024. Sources: Avantis Investors, “ETF Monthly Field Guide,” December 2024; 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.
