One year ago I wrote about the stock market predictions that major investment banks and brokerages seem to feel is a necessary part of their marketing (see https://www.cognizantwealth.com/2024/01/10/a-review-of-2023-stock-market-predictions/ ). Why they spend the time, effort, and money to come up with these guesses is a mystery to me, particularly because those predictions are almost always wrong, often spectacularly. If you recall, back then I reported that over 80% of economists surveyed by the Financial Times in 2022 predicted a U.S. recession sometime in 2023 that never happened. And in January 2023 the consensus among Wall Street firms was that the S&P 500 would end that year with a 4.4% gain. The actual return turned out to be over 24%.

This year is no exception. I repeat here the end of year 2024 price predictions (and returns) of the S&P 500 made by some of the top financial firms back in January 2024:

• JP Morgan Chase: 4200 (-12%)
• Morgan Stanley: 4500 (-5.5%)
• Wells Fargo Securities: 4625 (-3%)
• UBS Global Wealth Management: 4700 (-1.5%)
• Bank of America: 5000 (+5%)
• Deutsche Bank & Goldman Sachs: 5100 (+7%)

The actual return was 23.3%. Unsurprisingly they all missed it by well over a mile. Why? As I’ve said before, predicting something as complex as the average price return of the shares of stocks of the 500 largest companies in the U.S. is not just difficult. It’s impossible.

The price per share of any stock at any point in the future is based on two factors: (1) the company’s earnings per share times (2) the price/earnings (P/E) ratio (the price investors are willing to pay for each dollar of earnings). When the stock’s P/E ratio is higher, it means that investors are willing to pay more for the same level of earnings from that company as compared to when its P/E ratio is lower, and vice-versa. That’s what’s called investor sentiment. Individual company P/E ratios fluctuate all the time and you can aggregate them to reflect investor sentiment with respect to the overall market at any given moment.

In order to predict a company’s future price per share, you first have to be able to accurately predict the actual profits of each of those companies at year-end. That’s something even their own CEOs have difficulty doing, what with changes to competition, regulations, cost of capital, etc. during the period.

The impossible part is to predict investor sentiment. What causes investors to change the price they’re willing to pay for each earnings dollar? A myriad of things, most of which are impossible to predict. Sometimes it happens quickly, such as after the Fed announced (only?) a 25 percentage point rate cut last December 18^th. Other times investors can become very optimistic, as we saw after the election results last November. But how can anyone know what investor sentiment will be at any point in the future? Without knowing that there’s no way to predict future stock prices.

The top Wall Street firms have already come up with their predictions for 2025. But I’m not going to bother to track them this time. They’ll most likely be wrong again.

(PERIGON is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 877-977-2555 or by emailing compliance@perigonwealth.com).