Major Banks Miss the Mark: Should We Trust Analyst Forecasts?

Deep analysis and sound reasoning are essential for making market predictions, but they don't guarantee accuracy. This reality became all the more evident when J.P. Morgan's forecast about the S&P 500 index testing the lows of the first half of 2022 didn't come to fruition. Similarly, Bank of America analysts, despite their thorough understanding of market conditions, also missed their mark, having anticipated a sustained bearish sentiment towards risky assets.

Despite conditions that seemed ripe for a market downturn, both institutional ("smart") and retail ("dumb") investors, buoyed at least in part by buybacks and dividends, remained in the market. Consequently, the S&P 500 saw an approximate increase of 8.4% in the first half, and the Nasdaq surged by over 24%, this despite small-cap companies experiencing a downturn.

Of course, professionals’ prognostications have almost never been uniform. In December 2021, Goldman Sachs forecasted that the S&P would finish 2022 at 5,100, while Morgan Stanley predicted a level around 4,400. However, the S&P 500 actually closed at 3,829, and none of the major analysts foresaw that 2022 would be the most challenging year for U.S. stocks since 2008.

It's important to remember that predictions are models built on logical and comprehensible arguments. However, reality has a way of surprising us, and outcomes can deviate from expectations. In essence, if money continues to flow into the market, predictions of a decline based on a slowing economy may not necessarily materialize.

Thus, the question of which professional prognosticators to trust, and under which circumstances, remains ripe for discussion. Do you typically heed analyst predictions—why, when, whose—and do you find them beneficial?