Tune Out the Noise

John Yeigh

AS IF WE DIDN’T already have enough evidence, here’s further proof that stock market predictions have little value: A year ago, 24 highly regarded stock market pundits forecasted that the S&P 500 would close out 2022 at 4,904, according to data posted by CNBC’s Brian Sullivan. That 4,904 was the average, with their predictions ranging from a low of 4,400 to a high of 5,330. The S&P 500’s actual 2022 close was 3,840.

Meanwhile, the pundits’ average forecast for the collective earnings of the S&P 500 companies in 2022 was $230, with a low of $206 and a high of $245. The actual S&P 500 earnings won’t be known for some weeks, but a current set of analyst estimates puts them at $220.

In other words, the pundits got their earnings estimates largely right—their predictions were less than 5% too high—but their stock-index predictions were, on average, 28% too high. That means the pundits were, in effect, hugely wrong on their price-to-earnings ratio (P/E) estimates. They predicted a P/E of 21.4, on average, when the actual P/E came in at around 17.5.

Why were the pundits so wrong? Consider that the S&P 500 started 2022 at an all-time high of 4,797. The average forecast of 4,904 at year-end 2022 was only 2% higher. Throw in the predicted earnings growth, and the pundits were projecting a decline in the P/E ratio.

The implication: The pundits’ S&P 500 predictions weren’t wildly optimistic, but they still missed the mark by a wide margin. What they didn’t anticipate was the Federal Reserve raising short-term interest rates by four percentage points to tame inflation, the Ukraine war and other geo-political tensions, and the growing possibility of a recession.

Where does that leave us? HumbleDollar’s readers should continue to ignore market forecasts—but they should also realize that financial markets have gotten much friendlier to investors. Today’s stock market is far cheaper than at the start of 2022. Uncomfortable with stocks? Instead, you could always lock in bond yields approaching 5%.

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