You’ve heard us say time and time again, we prefer probabilistic thinking over stories. We operate by expectations grounded in history and evidence rather than forecasts that require a crystal ball. Why?
Philip Tetlock’s Research
The largest empirical study evaluating the accuracy of expert forecasts and the skill of forecasting took place from 1984 through 2004. Philip Tetlock summarized the 20-year research project in his book, Superforecasting.
This landmark prediction study concluded that human beings who spend their lives studying the state of the world are, in other words, poorer forecasters than dart-throwing monkeys, who would have distributed their forecasts by shear randomness. Tetlock chose chimpanzees simply because they’re funny. It certainly made for a more memorable soundbite.
Tetlock also found that specialists are not significantly more reliable than non-specialists in guessing what is going to happen in the region they study. Knowing a little might make someone a more reliable forecaster, but Tetlock found that knowing a lot can actually make a person less reliable.
The Illusion of Knowledge
Why don’t more people know this empirical truth about forecasts? I believe it’s because the illusion of knowledge is attractive. It’s easy to mistake our activity of reading forecasts as actual achievement. Our desire to reach into the future will always exceed our grasp of it.
The only certainty promised by the future is uncertainty. Rather than accept that uncomfortable truth, we turn to those who exude the illusion of knowledge and certainty because they make us feel better.
In a 24/7/365 news cycle, the media is always looking for soundbites and quotes of so-called experts. We are all overwhelmed by “news” we didn’t pay for that is merely monetizing our attention via advertising. Very rarely does the attention industry provide us with forecasts that improve our decision making or economic outcomes.
Forecasts Lack Accountability
Another reason that this mirage of forecasting remains popular is that people very rarely keep score. Forecasters are rarely held accountable for their inaccurate forecasts. However, on the rare occasion they get something right they’re quick to remind you. Yet there is no way to determine if the forecast was luck or skill.
Almost no one collects forecasts, judges their accuracy, and publishes the results. Portfolio managers publish their annual investment returns, baseball players have batting averages, and pharmaceutical companies publish efficacy results.
It sounds simple to score a forecast for accuracy, but so often the forecast lacks a specific date for when something will occur. The forecast might use subjective phrases like, “will gather significant market share.” What constitutes as “significant”?
Evaluating Public Forecasts
So let’s take this rare occasion to evaluate the public forecasts from some of the world’s largest financial institutions about the S&P 500 in 2022.
2022 would have been the year when they could have added the most value to an investor if they predicted what we’re experiencing today. In reality, the forecasts ranged from -3% to +17% at the time they were made. If you unpack that forecast range the average is +10%, which is roughly the nominal average return of the S&P 500 since 1926. What good are a group of forecasts that predict the average?
Closet index tracking, also known as index hugging, refers to funds that are marketed as being actively managed (thereby charging a higher management fee), but in fact deviate only marginally from a benchmark index and therefore require, in practice, limited management but reduces the chances of significant before-fee underperformance while earning more for the fund companies.
Below is a roundup of 14 of these 2022 forecasts for the S&P 500, including highlights from the strategists’ commentary. At the time of this post, the S&P 500 sits at 3,655.04.
Not surprisingly, no one predicted 9% inflation or a bear market.
- Barclays – 4,800 (12/2/2021): “Household and corporate cash hoards should support modest earnings growth but persistent supply chain woes, reversal of goods consumption to trend and China hard-landing are key tail risks.” (via Jonathan Ferro)
- DWS, David Bianco – 5,000 (12/1/2021): “2022 returns driven by earnings growth. Higher volatility with potentially significant intra-year sector rotations depending on level of real yields.”
- JPMorgan, Dubravko Lakos-Bujas – 5,050 (11/30/2021): “While there have been sporadic setbacks with COVID-19 variants (e.g. delta, omicron), this needs to be seen in the context of higher natural and vaccine-acquired immunity, significantly lower mortality, and new antiviral treatments… With this in mind, the key risk to our outlook is a hawkish shift in [central bank] policy, especially if post-pandemic dislocations persist (e.g. further delay in China reopening, supply-chain issues, labor shortages continue).” (via MarketWatch)
- Yardeni Research, Ed Yardeni – 5,200* (11/28/2021): “Assuming, as I do, that Omicron, the new variant of Covid, will turn out to be no worse than the Delta variant, I still expect that the S&P 500 will continue to rise to new record highs… The Fed may decide to taper faster in response to higher-than-expected inflation. But, it would still be adding liquidity, though at a slower pace, to the economy’s punch bowl — which already has plenty of liquidity from previous rounds of the Fed’s largess.“ (via LinkedIn)
- Bank of America, Savita Subramanian – 4,600 (11/23/2021): “Drivers for our outlook: a higher discount rate, US GDP primacy vs. China, rising capex but slowing consumption, the end of the ‘equity shrinkage’ bull case.”
- Jefferies, Sean Darby – 5,000 (11/23/2021): “Growth – Real and Nominal – is not likely to be a problem in 2022 as the US consumer, corporate, government and possibly the banks unleash their spending. But base effects work against earnings and high valuations meaning that market multiples matter.”
- BNP Paribas, Greg Boutle – 5,100 (11/22/2021): “We expect to see some compression of price/earnings ratio multiples as rates rise. However, strong earnings growth could still translate into a ~10% total return, in our view.”
- BMO, Brian Belski – 5,300 (11/18/2021): “An accommodative Fed, excessively low interest rates, potential peaking inflation and supply chain fears, and positive earnings growth REMAINS a very good recipe for equities – PERIOD.”
- Goldman Sachs, David Kostin – 5,100 (11/16/2021): “Decelerating economic growth, a tightening Fed, and rising real yields suggest investors should expect modestly below-average returns next year. The S&P 500 has historically generated an average 12-month return of 8% in environments of positive but slowing economic activity and rising real interest rates…”
- Wells Fargo Investment Institute – 5,100-5,300 (11/16/2021): “We expect supportive monetary policy along with public and private spending to push equity markets higher through the year.“ (via Wells Fargo)
- Morgan Stanley, Michael Wilson – 4,400 (11/15/2021): “With financial conditions tightening and earnings growth slowing, the 12-month risk/reward for the broad indices looks unattractive at current prices. However, strong nominal GDP growth should continue to provide plenty of good investment opportunities at the stock level for active managers.”
- RBC, Lori Calvasina – 5,050 (11/11/2021): “As for why we feel constructive (beyond the strong economy), cash deployment trends are positive, frothy earnings revisions are no longer an overhang on the market, individual investor sentiment turned so bearish recently that it briefly gave a contrarian buy signal for the stock market in October, and fiscal policy tilts supportive with corporate tax hikes less of a threat. The onset of tapering and proximity of Fed hikes have kept investors uneasy, but stocks normally post gains post lift off as long as the economy is strong enough to handle it.”
- UBS, Keith Parker – 4,850 (09/07/2021): “We forecast S&P 500 EPS to rise to $60 in Q2 ’22, inclusive of a tax hit, which would support 5,000+ for the S&P on a 21x trailing P/E. Slower forecast economic growth in H2 ’22 though and a flattening out of quarterly earnings at ~$60 accordingly should mean that gains are front loaded next year.”
- Credit Suisse, Jonathan Golub – 5,000 (08/09/2021): “We see upside to estimates as empty shelves are restocked and pricing power is maintained. Consumer spending should improve as the unemployment rate drops further, accompanied by higher wages.”
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