ORLANDO, Fla. (Reuters) – When Yogi Berra became famous for saying the future was particularly difficult to predict, he had financial market analysts in mind. I guess it wasn’t.
But as the turbulent events of 2022 underscored, the famous baseball player’s famous malapropism has been expressed in similar ways by others, in predicting the outlook for stocks, bonds and currencies. It probably applies.
Wall Street analysts are notoriously optimistic. Some might say it’s because the employer receives investment banking fees from his S&P 500 constituents, and being bullish is good for boosting business.
And since the stock market usually goes up, a year of declines is understandably a surprise. But this is exactly where investment banks and fund management professionals whose clients are well compensated can reasonably expect to benefit.
Crashes are difficult to time, but they are often the result of a slow stacking of specific triggers such as financial imbalances, rising interest rates, or the Great Depression, the oil shocks of the 1970s, the dotcom bankruptcy, or the Lehman Brothers collapse. will occur.
Some of the biggest crashes on record, such as Black Monday in October 1987 and the pandemic-induced plunge in March 2020, didn’t register on the annual scorecards and were ultimately included in the “up” years. increase. The resilience of equity investors is strong.
So is their optimism, which may explain why analysts almost always predict a good year ahead. This year was no exception.
A Reuters poll of 45 analysts conducted on 1 December 2021 found the S&P 500 had a median year-end 2022 forecast of 4910 points, representing a 7.5% increase at the time of publication. increase.
Median earnings growth forecast was just under 8%.
The S&P 500 is now below 4000, down 17% year-to-date and nearing one of its biggest losses in 80 years. Revenue growth in the fourth quarter is expected to be negative.
Indeed, few predicted that Russia would invade Ukraine in February, throwing commodity and energy markets into turmoil and causing global inflation to soar. This clearly hit equities and risk assets hard.
But price pressures were already evident this time last year and were a present danger. Global supply chains have stalled, with Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen saying within days that inflation is no longer “temporary.”
Even after Russia’s February 24th invasion of Ukraine brought war to Europe’s doorstep, Wall Street’s confidence (or arrogance, some might say) was alive and well. His late-May poll by Reuters showed his median S&P 500 expectation by the end of 2022 at 4,400 points, reflecting his 11.7% gain at the time.
This is the nature of the macro and market prediction game, and if I’m wrong, you better hope that enough of your peers are too. It’s safe to say that this is what happened this year.
Deutsche Bank’s Jim Reed said Wednesday that only 19% of the 750 respondents (mostly customers) in the bank’s year-end 2021 survey thought the S&P 500 would post a negative return this year. , noted that only 3% predicted a fall of more than 15. %.
This is despite respondents correctly saying the two biggest risks in 2022 are ‘higher than expected inflation’ and ‘an aggressive Fed tightening cycle’.
But even then, few fully predicted how strong inflation and the Fed’s response would be: just 2% of respondents expected US consumer price inflation to hit 7% by the end of the year. The median rate hike estimate was 50 basis points.
Their predictions for the US bond market were even more off the mark. Only 2% of respondents expected 10-year Treasury yields to exceed 3.0% this year, and only 4 expected them to exceed 3.5%. Now he is 3.48%.
“If you’re one of the 4 out of 750, email me and let me know your predictions for the next 12 months.
No one knows what 2023 will bring, but the general outlook for Wall Street is pretty bright again. It closed at 4200, up 6.8% from Wednesday’s close.
But Citi analysts think the consensus is too optimistic, with current U.S. stock market prices suggesting earnings growth of about 4% next year.
They say an earnings recession is coming, pointing to an average earnings drop of 28% during previous recessions over the past half-century. Bulls beware.
(Opinions expressed here are those of the author, a Reuters columnist.)
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By Jamie McGever.Edited by Andrea Ricci
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Opinions expressed are those of the author. They do not reflect Reuters News’ commitment to integrity, independence and freedom from bias under its Trust Principles.