(Bloomberg) - November’s near-record equity rally has left top strategists facing a wildly off-the-mark year but their analyst colleagues looking forward to their most-accurate in more than a decade, highlighting Wall Street’s onerous task of forecasting 2024 amid persistent economic uncertainty.
The S&P 500 is now an ego-bruising 15 percentage points higher than what strategists, who do so-called top-down market level forecasts, predicted at the start of the year on average. But the actual companies that make up the index are just 1.7% off where analysts, who do a bottom-up study of individual stocks, said they’d be.
That’s set up 2023 to be analysts’ most accurate year since 2010 and their third best since records began 19 years ago.
The gulf in forecasting success highlights the difficulty strategists face as they try to predict returns for 2024 in their widely-read market outlooks. Wars in Ukraine and Israel, the looming US presidential election, uncertainty around rate cuts, persistent fear of a US recession, economic instability in China, oil production cuts and artificial intelligence unknowns are making market-level predictions look like a fool’s errand.
Depending on which strategist you ask, the S&P 500 will either fall by as much as 8% or rise as much as 12% next year versus Tuesday’s close. Five of the top 18 strategists tracked by Bloomberg are yet to issue a full-year 2024 outlook. Analysts’ bottom-up strategy predicts the index will jump 11% in the next twelve months.
“Any estimates you have come with a humongous amount of noise, so you really need to avoid that false sense of precision,” Wei Dai, head of investment research at Dimensional Fund Advisors LP, said in an interview.
Dai, who recently published research finding most timing strategies underperform, sees attempts to time macroeconomic changes like rate cuts losing out to strategies that skew toward highly-profitable, small-cap and value companies.
Similarly, Brian Belski, chief investment strategist with BMO Capital Markets Corp. and one of the most accurate strategists this year with an initial 2023 target of 4,300, said some of his peers are over-reliant on “backward-looking” economic and quantitative data.
“I’m part of the lost generation that does story telling and bottom-up [analysis],” he said in an interview. “I just find it perplexing that so many people are waiting to buy, hold or sell based on macro data that previously happened.” Belski sees the S&P 500 rising about 12% to a record 5,100 next year, the second-most bullish forecast on Wall Street.
The bear case, which is a growing cohort including strategists at JPMorgan Chase & Co. and Morgan Stanley, suggests that November’s rally pushed valuations too high and has left the S&P 500 vulnerable to a significant downturn.
Traders at least believe the S&P 500 is likely to hold steady and close out the year within a few percentage points of analysts’ start-of-year prediction. But the good year would only lower their average error since 2005 to 11 percentage points after an abysmal 2021 and 2022, when they were more than 20% off target.
Strategists missed by 12 percentage points on average over the last three years, including by 22% in 2022.
Dimensional’s Dai suggests viewing forecasts as upper and lower bounds, rather than predictions: “Any estimate you see probably falls into a wide range of reasonable estimates,” she said. “But that also means that no one is better than the others, they are all equally noisy.”
(Updates seventh paragraph to clarify the strategies that Dimensional advises. Updates fifth paragraph with the number of strategists that are yet to issue a full-year 2024 target.)
By Redd Brown
