Each year, major Wall Street investment firms embark on an “impossible” task: predicting the exact trajectory of the S&P 500 for the coming calendar year. As The New York Times columnist Jeff Sommer writes, “This mission is impossible — but that hasn’t stopped teams of well-trained strategists at august brokerages and investment banks…from focusing their analytical firepower on forecasting the future.”
The exercise is notable not for its accuracy but for its consistency in missing the mark. According to Paul Hickey, co-founder of Bespoke Investment Group, Wall Street’s annual consensus forecasts have historically predicted average gains of 8.8% since 2000. Yet, as Hickey’s data reveals, “the variance between actual annual performance and the prediction was huge — an average gap of 14.2 percentage points.” Sommer remarked, “Being wrong by that much means that these forecasts weren’t merely inaccurate. They were completely out of bounds.”
Despite this, the predictions persist. “The amazing thing, with a record like this, is that the strategists keep trying,” Sommer wrote, adding that he admires their “supreme self-confidence.”
Why Are Predictions Always Optimistic?
The data reveals a peculiar trend: Wall Street never predicts annual market declines. In the 25 years of Hickey’s analysis, the S&P 500 fell in seven calendar years, including significant drops of 19.4% in 2022 and 38.5% during the financial crisis of 2008. Yet, Sommer noted, “the Wall Street consensus never predicted an annual stock market decline.”
When questioned, strategists privately attribute their constant optimism to the bullish outlook favored by the firms that employ them. Publicly, they attribute the predictions to their “models” for the markets.
The Consequences of Missed Predictions
The gap between predictions and reality has real consequences for investors. For example, after the S&P 500 fell 19.4% in 2022, strategists forecasted a modest 6.2% gain for 2023. Instead, the market rose 24.2%. For 2024, predictions of a 3% rise were similarly off the mark, with the index up about 23% by mid-December. Sommer observed, “If you had lightened your stock market holdings in response to the strategists’ predictions…you would have missed out on a tremendous rally.”
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Looking Ahead to 2025
For 2025, strategists are unusually optimistic, projecting a 9.6% price gain for the S&P 500, or an 11% total return when accounting for dividends. While such predictions might sound enticing, Sommer warned against relying on them: “Given all those previous misses, the strategists’ belated optimism gives me no comfort and little information.”
A Better Approach to Investing
Sommer emphasized that market forecasts should not dictate investment strategies. “Trying to get in and out of the stock and bond markets with perfect timing is a fool’s game,” he wrote. Instead, he advises focusing on long-term probabilities and diversification through index funds. “Plan on investing for decades, if you can, and try to ride out the troubles that will inevitably afflict the markets from time to time.”
Ultimately, Sommer concluded, “Enjoy [market forecasts] as the fortunetelling fantasies they have become, and keep them apart from your real investing life.”