Predicting the Future

Would you like an extremely well-paid job for making forecasts that nobody seems to expect to be correct? Such jobs must exist because every year, major banks and brokerage houses produce ‘target ranges’ for the performance of the S&P index for the forthcoming calendar year. 2025 is no exception.

From Goldman Sachs to Deutsche Bank numbers have been produced and published. Wells Fargo even has the authoritatively named ‘Wells Fargo Investment Institute’ to make its predictions. Surely an organization with a name like that is going to be accurate?

Some of the forecast headlines are amusing. One of my favorites is from Vanguard, which notes there is “both optimism and uncertainty about 2025.” That pretty much sums up how I feel before watching my favorite soccer team play. 

Given the strong returns of 2024 and positive investor sentiment, it is no surprise that all the major forecasters are positive about 2025. The range is tight, with no organization forecasting anything less than a gain of 7%. I cannot understand why everyone is positive. There are many well-known risks in the world. This would suggest that at least one or two forecasters might favor caution. Of course, there is the possibility that annual predictions are driven by factors in addition to objective, quantitative analysis. Nobody is comfortable wandering too far away from the herd. Moreover, there might be some internal pressure to talk up markets because of the potential impact on the bottom line. Pie sellers do not sell many pies if they tell their prospective customers that their wares are rotten.

The pantomime of annual stock market predictions has long been known to be a conversation starter at best. An organization called Bespoke Investment Group has tracked how annual forecasts compare with actual market results each year since the year 2000. The latest update confirms the expected. The Wall Street consensuses predicted a positive annual performance for every one of the 25 years captured by Bespoke’s analysis (even 2008 and 2022). Moreover, the gap between actual performance and prediction was a tad over 14%.

Much like the pre-game prognostications of sports experts, nobody really expects the experts to be right. It is just fun to talk about it. The risk with forecasts about the investment markets, however, is that they tap into a base human emotion. The idea that it is possible to get rich quick through making the ‘right’ trade can be hard to resist. Smart, confident people who seem knowledgeable can be seductive sales folks. Just as bad, the human tendency to talk loudly about success but keep quiet about failure strengthens the fear of missing out.

If you want entertainment or a topic of conversation, take a look at the annual stock market forecasts. But if you want a more thoughtful approach to investing in the public markets, you are better served by adopting an approach similar to Nick Saban’s boring but effective long-term process.

Richard Rushton