December is a month full of market predictions for the year to come. Everyone, from economists to analysts to grocers, seems to have a strong feeling about how stocks will behave going forward.
Here's the thing: They're almost always wrong.
What's happening: Last year, Goldman Sachs analysts predicted that the S&P 500 would close out 2022 at 5,100 points. Morgan Stanley predicted a more bearish 4,400. The S&P 500 closed on Tuesday at 3,829.
No major analysts predicted last December that this year would (likely) be the worst for US stocks since 2008, that oil prices would shoot from $70 to $130 and then careen back to $70, and that the Federal Reserve would announce four straight historic three-quarter point interest rate hikes.
Geopolitical chaos, global pandemics and extreme weather events have created unexpected and outsized head and tailwinds -- creating extremely turbulent rides for markets.
"As they take stock of this year, investors should strike a certain sense of humility as they peer into next," wrote Christopher Smart, chief global strategist at Barings in a recent note. "They may take some consolation that outside US intelligence circles, almost no one expected a Russian invasion last December. But that will be small consolation amid difficult markets and evanescent returns."
Most analysts seem to expect that inflation risks will subside next year, leading the economy into a light recession and eventual recovery -- but they're still asking investors to wear their seatbelts at all times, in case of any unexpected bumps along the way.
With those caveats, let's get to Wall Street's predictions
The numbers: Forecasts for where the S&P 500 will finish 2023 vary greatly. Below is a roundup of estimates made by five major banks, reported in notes and year-end reports. You can see that they're largely hovering around 4,000. (Note: these predictions are subject to change).
- Barclays: 3,725
- Citi: 3,900
- Bank of America: 4,000
- Goldman Sachs: 4,000
- JPMorgan: 4,200
The bottom line: Take these predictions with a grain of salt.
Over the previous 20 years, the average difference between the target price estimates by industry insiders at the beginning of the year and the final price for the index for that same year has been 8.3%, according to a FactSet report.
Analysts overestimated the final value (that is, the final value finished below the estimate) in 13 of the 20 years and underestimated the final value (the final value finished above the estimate) in the other 7 years.
This year, forecasters are set to miss the mark by their widest margin in about 15 years, according to FactSet data. They're on track to have overestimated the performance of the S&P 500 in 2022 by nearly 40%.
Market analysts are great at explaining what drives stocks in the short-term, but predictions clearly haven't been their cup of tea -- nor should they really matter to investors. The S&P 500 has good years and bad years, but long-term investors know that it typically works out in the end: The return averages out to about 10% per year for nearly the last century.
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