Define Irony: Analysts Who Overestimated Stock Returns By 10% See 10% Gain Ahead For Very Same Stocks

As I think I’ve made abundantly clear by now, you should take analysts’ “projections”  with a grain (or perhaps a whole shaker) of salt.

The truth is, no one can predict where a stock will trade in one month let alone one year. The same goes for macro forecasts. Sure, the Street will cite things like DCF models or SOTP analyses on the way to justifying their price targets, but in reality, the factors that influence stock prices can very often be characterized in retrospect as black swan events.

Just as “life is the cumulative effect of a handful of significant shocks,” (to quote Nassim Nicholas Taleb), asset prices are ultimately determined by a series of largely unforeseen events. Or else by a series of events that if we did see them coming, not enough of us acted on our predilections to dampen their influence.

As I wrote in “Don’t Be A Monkey: Changing The Meaning Of ‘Actionable’ Research,” if Tesla’s autopilot causes a 100-car pile up next week, killing a school bus full of first graders in the process, all of your calculations will amount to shit when it comes to determining where the stock trades.

Be that as it may, we still care what analysts say. Why I don’t know, but we do. If we didn’t, I wouldn’t be writing this and I would have never clicked on the article from which the following excerpts are taken. So think about all of that as you peruse FactSet’s summary of analyst projections for the new year:

Industry analysts in aggregate predict the S&P 500 will see a 9.7% increase in price over the next 12 months. This percentage is based on the difference between the bottom-up target price and the closing price for the index at the end of December. The bottom-up target price is calculated by aggregating the median target price estimates (based on company-level estimates submitted by industry analysts) for all the companies in the index. On December 31, the bottom-up target price for the S&P 500 was 2456.39, which was 9.7% above the closing price of 2238.83.


At the sector-level, the Health Care sector had the largest upside difference between the bottom-up target price and the closing price (+16.6%), while the Telecom Services sector had the smallest upside difference between the bottom-up target price and the closing price (+1.4%).

How accurate have analysts been in predicting the future value of the S&P 500?

On December 31, 2015, the bottom-up target price was 2335.73. Compared to the actual closing price of 2238.83 at the end of December 2016, industry analysts overestimated the price of the index by 4.3% one year ago.


Over the past 12 months (January 2016 to December 2016), the average difference between the bottom-up target price estimate at the end of the month one year ago and the final price for the index at the end of the same month one year later has been +9.9%. In other words, industry analysts on average have overestimated the final price of the index by 9.9% at the end of each month during the previous 12 months.

So analysts see the S&P rising by 10% in 2017 – and analysts overestimated price gains in the very same index by that very same amount in every single month of 2016.

Oh, the irony.


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