Wednesday, December 28, 2022
Today's newsletter is by Julie Hyman, anchor and correspondent at Yahoo Finance. Follow Julie on Twitter @juleshyman. Read this and more market news on the go with Yahoo Finance App.
We all have our little traditions to end a year.
Some people make resolutions, or "best of" lists.
I look back at stock market forecasts from the prior year.
Part of Wall Street strategists' job is to set targets for the S&P 500. And as equities limp toward the finish line for 2022, I wondered if anyone had seen the drop coming.
The short answer is no.
As of November 2021, the median of 12 forecasts was 4,825, according to Bloomberg. The highest was 5,300, from Brian Belski of BMO. The lowest was 4,400, from reliable bear Michael Wilson of Morgan Stanley.
With three trading days to go in 2022, the S&P 500 closed at 3,829.
S&P 500 (^GSPC)
To be fair, there were a lot of unpredictables this year. Unprecedented, some might say.
Russia’s invasion of Ukraine was chief among them. Investors also had to contend with China’s continuing COVID shutdown, persistent global inflation, a sharp drop in bonds along with stocks, a tech plunge, and a huge (alleged) crypto fraud. And this list is not exhaustive.
Some strategists anticipated those events — with the exception of the first — but few got it all right.
Of course, the strategists changed their forecasts as more information rolled in. By mid-September, around the time the index was making what turned out to be its lows for the year, the median of 23 forecasts had moved down to 4,300. By mid-October, it had fallen further, to 3,988.
Forecasting is especially tricky when it comes to picking the level where an index will end the year. Strategists use models with a multitude of inputs, both "top-down" (i.e. aggregate earnings estimates) and "bottoms-up" (i.e. company-specific earnings estimates).
And some strategists avoid the index-forecast game entirely.
One of them is Michael Darda of MKM Partners, who carefully couched his S&P target comments in a recent note to investors.
"Back in 2020, the S&P 500 bottomed at about 18x five-year forward estimates, which would be about 3300 or so, roughly a 14% fall from where the S&P 500 closed last week," Darda wrote. "Although this is simply a rough starting assumption (it could be worse and also could be better if we are wrong about a recession next year) keep in mind that in the event of a downturn, markets usually bottom out about two-thirds of the way through the recession (or four-to-five months before a recovery begins)."
When asked why he avoids a specific target, Darda quoted famous economist John Maynard Keynes: "Better to be roughly right than precisely wrong."
