The truth behind Wall Street’s market forecasts

 “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” – John Kenneth Galbraith

The holiday season may be over, but the season of Wall Street’s annual forecasts continues.

Big banks and asset managers often do a fine job laying out a narrative for what could move markets and the economy in the year ahead. But surprises (both good and bad) are always on deck, so it’s unlikely that these outlooks contain anything that can be used to successfully time the markets, in our opinion.

The annual dartboard

We know it can be fun to guess where the S&P 500 will wind up year-end. Who hasn’t played that game? And it’s natural to seek moorings when you face a year of market uncertainty. But it’s best to treat these forecasts only as entertainment.   

Just take a look at Wall Street’s record. The Bloomberg consensus forecast for the S&P 500 percentage change among Wall Street pros has been off by 13 percentage points, on average, since 2007. To underscore the point, the consensus was off by more than 20 percentage points in both 2024 and 2022, entirely missing both the bull and bear markets that happened in each of these years, respectively.

Wall Street’s record with predicting inflation and economic growth is about as weak. A mere 0.5 percentage point can make a massive difference in U.S. annual inflation and economic growth, and Wall Street consensus forecasts have been off by more than two whole percentage points at times.

One-year predictions vs. many years of data

We say all of this with nothing but respect for our Wall Street brethren. The big reason forecasts are so unsuccessful is that the world is full of interacting factors and surprises, which are simply impossible to predict.   

Another reason we put little stock in short-term forecasts is that we believe investment success lies beyond them. Decades and decades of market data and established financial theory illustrate that over the long term, there are drivers of investment risk and return. Prudent exposure to these drivers can enhance expected return – again, over the long term.

Our approach

It’s impossible to predict how any one of these drivers of return will perform in any given year, so at Edelman Financial Engines, we use a number of these drivers in our diversified portfolios. To help capture the market’s full risk/return potential, drivers are represented across 15 asset classes in both equities and fixed income. We include a range of equity styles, from small value to large growth, and a variety of bonds, such as corporate debt and mortgages.

Rather than relying on 12-month predictions, we believe diversifying across these long-term return drivers can compensate investors for inescapable market and economic risks.

But let’s bottom line it for you with this question: If your portfolio is meant to provide through retirement, how relevant can one-year predictions be when your investment horizon needs to span decades? That’s the long-term horizon we focus on to help achieve investment success for our clients.