Where Wall Street's year-end price target calculations often go wrong 😑

Morgan Stanley's Michael Wilson nails what's 'very hard to predict' 🤦🏻‍♂️

Wall Street price targets have changed significantly since the beginning of the year. (Source: TKer)

The stock market continues to have Wall Street on its heels, with top strategists scrambling to revise year-end targets as prices rapidly rally to new all-time highs.

Last Friday, May 17, Deutsche Bank’s Binky Chadha raised his year-end target for the S&P 500 to 5,500 from 5,100. On Monday, Morgan Stanley’s Michael Wilson raised his year-end target to 5,400 from 4,500.

Chadha and Wilson join peers at BMO, CFRA, Oppenheimer, RBC, Societe Generale, BofA, Barclays, UBS, and Goldman Sachs who’ve already raised their targets. (It’s all a reminder that you should approach one-year price targets with caution. Read more about that here.)

So, should you totally ignore these forecasters?

I would not be so quickly dismissive.

For starters, their earnings forecasts seem to be on the right track. And earnings are the most important long-term driver of stock prices.

Despite lots of new information about the economy and business prospects, earnings forecasts haven’t really changed much since these strategists first published their targets about six months ago. This is illustrated in the chart below from FactSet, which shows how 2024 and 2025 earnings per share (EPS) estimates have evolved over time.

Earnings forecasts have mostly gone sideways in a relatively tight range. (Source: FactSet)

Wilson’s forecast currently assumes EPS of $239 in 2024 and $269 in 2025, up modestly from the $229 and $266 he estimated back in November.

These low-single-digit revisions to his EPS targets are in contrast to his 20% upward revision to his price target.

That means a bad assumption about valuations played a big role in his price-target calculation failing.

This is where Wall Street's year-end price targets almost always go wrong 😑

“It's very hard to predict exactly when valuations will normalize,” Wilson wrote on Monday.