A better way of thinking about Wall Street's year-end price targets 🗺️

'As a compass as opposed to a GPS' 🧭📍

(Photo by Jamie Street on Unsplash)

I’m not all that crazy about one-year price targets for the S&P 500. Predicting exactly where prices will be in 12 months is impossibly hard, and no one has figured out how to do it consistently.

But as the related links below show, I still spend a healthy amount of time covering them.

That’s because we can learn a lot of lessons from this exercise. Also, the research behind these targets is often very interesting and useful for long-term investors. And price targets can help us understand a strategist’s view of the direction of the market.

Leave it to RBC’s Lori Calvasina, one of the sharpest strategists on Wall Street, to provide a great analogy that she’s been sharing for a while. From her research note on Monday (emphasis added):

As always, we stress that our price target is a signaling mechanism for our views on stock market direction from here through the end of the year in question (2025) that should be viewed as a compass as opposed to a GPS. It is a construct that helps to articulate whether we believe stocks will move higher and why. We do expect to revise our price target throughout the year as new information about the backdrop for stocks becomes available – the exact same way analysts who cover individual companies make adjustments to their price targets as new information emerges.

It takes a pretty thoughtful analyst to acknowledge that it’s not possible to have all of the next year’s market-moving information at any given time. And therefore, it’s not possible to derive a one-year price target with a very high degree of confidence.