On the Value of Market Strategist Forecasts

As we turned the calendar to 2025, market Wall Street market strategists put out their forecasts for the coming year. Do those forecasts have any value? Should you be paying attention? A large body of research (for example, see here and here) has found that market forecasts by so-called experts are no better than random. Neither are survey forecasts (the wisdom of crowds).

The value of survey forecasts

Songrun He, Jiaen Li and Guofu Zhou, authors of the March 2023 study, “How Accurate Are Survey Forecasts on the Market?,” examined three sets of survey forecasts (The Livingston Survey conducted by the Federal Reserve Bank of Philadelphia, the CFO Survey and the Nagel and Xu (NX) survey) and found that none of them beat a simple random walk forecast that predicted the future returns by using their past sample mean.

The empirical evidence demonstrates that the only value in market strategist forecasts is that they show that a wide dispersion of outcomes is possible.

2024 Forecasts

The following chart shows the forecasts of 20 prominent market strategists for the return of the S&P 500 for 2024.

While the S&P 500 closed 2024 at 5,881.63, up 23% for the year (and Vanguard’s S&P 500 ETF VOO, which includes dividends, returned 25%) the most optimistic of forecasts was Edward Yardeni’s +13%. On the other hand, JPMorgan’s strategists forecasted a decline of 12%. Consider the investors who were spooked out of the market by such pessimistic forecasts from such a leading firm as JPMorgan.

The following chart from Avantis’ November 2024 Monthly ETF Field Guide shows that not only is such a wide dispersion of potential outcomes likely, but the median forecast is typically wrong by a wide margin— the average error was almost 19%!

Behavioral Errors

Given the empirical evidence, why do investors pay attention to the forecasts of market strategists? One explanation, based on my almost 30 years of experience as an investment advisor, is the existence of an all-too-human trait known as confirmation bias—the tendency to favor information that confirms our existing beliefs (we actively seek out and prioritize evidence that supports our pre-existing viewpoints) and ignore or downplay information that contradicts our beliefs (dismissing or explaining away evidence that challenges our existing worldview).

Investor Takeaways

While current valuations are the best predictor we have of future long-term returns, they have almost no correlation with short-term returns (such as one year). Thus, investors should not attempt to forecast short-term market movements or rely on estimates they see in the media. An even worse mistake would be to try to time markets based on these predictions.

The takeaway for investors and advisors alike is that there are no crystal balls that allow you to see the future clearly. Thus, when building a financial plan, a wide dispersion of potential outcomes must be considered, with investors being willing and able to accept the downside risks. Recognizing our (and even experts’) limited ability to predict the future is an important ingredient of the winning investment strategy. If you are prone to acting on forecasts my recommendation is to start keeping a diary. Write down every time you are convinced the market is going to go up or down. Keeping a track record will help eliminate another all-too-human trait that leads to mistakes, overconfidence.

Larry Swedroe is the author or co-author of 18 books on investing, including his latest Enrich Your Future.