Analyzing the Forecasters

How overoptimistic are Wall Street forecasts year in and year out?

Salil Mehta, business statistics professor at Georgetown University addresses that question on his “Statistical Ideas” blog: Strategists Full of Bull.

Mehta collected 186 public forecasts from 1998-2015 of the annual ritual of making market projections for the year ahead.

Firms included JPMorgan, Citigroup, Goldman Sachs, Merrill Lynch, Bear Stearns, Lehman, Morgan Stanley, Prudential, UBS, AG Edwards, Bank of America, etc. Not every company made a forecast every year. Some of the firms are now extinct.

Data primarily comes from Barron’s as far back in time as continuously available. For a couple years, when Barron’s data wasn’t easily available, Mehta used market prediction made in USA Today’s or similar surveys. 

Forecasters Full of Bull

Results were no better than a coin toss as to whether the S&P came in above or below the average forecast. 

Nonetheless, every year had one thing in common: Not once did a consensus predict a down year.

On average, forecasts were wildly bullish, even with the gains in recent years. 

In his analysis, Mehta focused primarily on distribution and standard deviations. Some may find his dispersion charts confusing. To his credit, Mehta made his Analyst Forecast Data available for others to analyze and I took him up on it. 

Data prior to 2001 was for the Dow. I used years 2001-2015 in my analysis so the numbers are consistent line to line.

In the table below, S&P 500 projections are the average of all the analysts making calls for that year.

S&P 500 Predicted Gains vs. Actual Gains 

Date Predicted S&P Predicted Gain% Actual S&P Actual Gain% Gain Difference 2001 1697 28.56% 1148 -13.03% -41.59% 2002 1278 11.28% 880 -23.34% -34.63% 2003 1019 15.81% 1112 26.36% 10.56% 2004 1133 1.92% 1212 8.99% 7.07% 2005 1257 3.69% 1248 2.97% -0.72% 2006 1372 9.93% 1418 13.62% 3.70% 2007 1519 7.11% 1468 3.53% -3.59% 2008 1640 11.75% 903 -38.49% -50.23% 2009 1045 15.77% 1115 23.48% 7.71% 2010 1239 11.09% 1258 12.83% 1.73% 2011 1373 9.16% 1258 0.00% -9.16% 2012 1355 7.73% 1426 13.35% 5.63% 2013 1562 9.57% 1848 29.59% 20.03% 2014 1977 7.00% 2059 11.42% 4.42% 2015 2209 7.26% 2044 -0.73% -7.99% 2016 2220 8.61%      
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