It’s that time of year again. Time to make guesses about where stock prices are going to be next year. It’s the time of year when strategists (who study the macroeconomy and make estimates on where they think those trends will lead stocks) provide estimates on earnings and prices. The big sport everyone follows is the 2023 year-end price estimates for the S & P 500 . This year, there is an unusually high level of cluelessness. By “cluelessness,” I do not mean stupidity. I mean that the macro situation is so confusing, and the potential outcomes so wide, that it is almost impossible to get a consensus. Strategist estimates for 2023 are all over the map Strategists, not surprisingly, remain a fairly bullish lot. A survey of 22 strategists conducted recently by Bloomberg indicated that only three of the 22 see the S & P lower this time next year than now. The average price target for year-end 2023 was 4,078. That would be about 7% higher than where the S & P is now. However, the dispersion of estimates is unusually high. They ranged from a low of 3,400 (PNB Paribas) to a high of 4,750 (Fundstrat). Eleven expect the S & P will be 4,100 or above at the end of 2022. Five think it will be above 4,300. That is a very wide divergence of opinions. It’s understandable that strategists are clueless. The S & P 500 tends to rise about 10% a year, on average. No surprise, in a normal year (one without any large macro shocks) most strategist price estimates tend to hover in that range. That we have some strategists who think prices will be down 10%, and others who think we will be up nearly 25%, indicates that there are a lot of moving parts that are confusing everyone. There’s the continuing effects of Covid , particularly in China, where a reopening is unfolding with a very uncertain outcome. There’s the Russia invasion of Ukraine. And, most importantly, there is the Fed higher for longer. How much longer? What kind of recession are we going to have? Any one of these alone could create a wide range of economic outcomes. Put all three together, and it’s little wonder strategists are having trouble figuring out what is going on. Earnings estimates are all over the map, too. The same survey of strategists indicated earnings estimates for 2023 varied widely, but most expect earnings will be lower. The current estimate for S & P 500 earnings for 2022 is about $220. The average of strategists think 2023 will see earnings at $210, a drop of 4.5%. Once again, the range of estimates is very wide, from a low of $186 (Ned Davis) to a high of $230 (Oppenheimer). That’s a range of down 15% to up about 5%. These strategists are much more bearish than their brethren analysts, who study individual companies and sectors. Collectively, analysts see 2023 S & P 500 earnings at $230, a gain of 4.5%. That divergence — strategists thinking earnings will be down 4.5%, analysts thinking it will be up 4.5% — is also unusually wide. Don’t pay too much attention to this stuff Aside from noting that the extreme levels of opinion indicate strategists are more confused about the future than they usually are, I don’t pay too much attention to these estimates. Here’s why: They are nothing but guesses. They have no predictive value. The track record of strategists are no better than anyone else. They are no better than analysts, amateur stock pickers, professional stock pickers, economists, or the Federal Reserve. They are all terrible at predicting the future. In my book, “Shut Up and Keep Talking: Lessons on Life and Investing from the Floor of the New York Stock Exchange,” there’s several chapters devoted to why no one can figure out the future. It boils down to two problems: 1) there are many biases that affect our ability to think clearly and that affect the outcome of predictions, and 2) there are so many variables in predicting the future that it is almost impossible to make an accurate prediction, and it gets more difficult the farther anyone goes out. Bottom line: These estimates are stories that we tell ourselves to create the illusion that we have some control over the future. We are not leaves blowing in the wind, but we do not have the kind of control that would be necessary to predict stock prices a year in the future.
