Stock Market Predictions: Can We Trust Them?

Don’t believe the hype: those predictions you’ve read are probably wrong

Stock market forecasts at the beginning of each year make interesting reading – but we shouldn’t always expect them to get it right. In fact, pay too much attention to predictions and it could distract you from reaching your long-term savings goals.

It’s a question we see crop up time and again: “How did they get it so wrong?”

• The political pundits who miscalculated on Brexit and Donald Trump
• Overly optimistic Met Office forecasts for a ‘barbecue summer’ in 2009
• Jim Cramer, host of CNBC’s Mad Money insisting “Bear Stearns is fine, do not take your money out!” – just before the US investment bank failed in 2008

People make predictions at their peril.

But still, they come…

There are always a lot of predictions at this time of year – lately, we’ve been spoilt for choice with forecasts from asset managers with their thoughts for the year ahead.

But there’s no sign the accuracy is getting any better.

For 2024, equity analysts had mixed views on what was going to happen. As the chart below shows, none of them were quite optimistic enough. Nearly half the analysts polled thought the S&P 500 (the largest companies in the US), would have a negative year. And even the positive ones didn’t predict the index would rise well above its historical average, rising 23.3%.

It’s not a new phenomenon. As this analysis on where the S&P 500 would be at the end of 2019, back in 2018 showed. Forecasts of the S&P 500 were off by more than 10 percentage points in 13 out of 20 years. More than half the time, they didn’t even get the direction of the market right.

Source: Dimensional Fund Advisors, Equity analyst predictions compared with actual (price-only returns), for the S&P 500 Index, calendar year 2024. Historical average based on S&P average annual total return from 1927 to 2024. Past performance does not guarantee future returns.

Of course, there’s a place for predictions

The Bank of England needs to peer into its crystal ball to a degree when it’s setting interest rates, as it works out what will happen with the economy. Investment analysts must try to guess how companies will perform in the future, based on evidence such as company earnings reports.

The danger is, that we can become too focused on predictions and blinkered to the possibility that what’s forecast might not actually happen.

Going back to the example of the heatwave predictions in 2009: meteorologists said there was an 80% chance of above-average temperatures. But the idea of a ‘barbecue summer’ proved irresistible for the media. The fact that there was a 20% likelihood of it not happening was long forgotten (until it started raining that is).

Beware of the ‘bandwagon effect’

This ‘bandwagon effect’ shows just how vulnerable we can be to cognitive biases. When an idea becomes popular, there’s a tendency for everyone else to pile in, amplifying the positive or negative.

Take Nvidia as an example. The US chipmaker has risen to become one of the world’s biggest companies by market cap, thanks to the artificial intelligence boom, but it’s also a prime target for overly optimistic investors. In January, these investors got spooked by the threat of competition from China’s DeepSeek. It lost $600 billion off its market cap, the largest one-day loss in US history.

This is even more of a threat with the rise of ‘finfluencers’. There’s evidence the next generation increasingly gets its information on how to save or where to invest from social media platforms such as TikTok or YouTube.

But just like TikTok health hacks such as taping your mouth at night to help you sleep better, or pouring beer on your skin for a better tan, this advice isn’t always reliable. Research from MoneySuperMarket last year analysing 350 short-form videos found that nearly three quarters (74%) of these ‘finfluencer’ clips contained financial advice that was “incorrect, misleading, high risk or potentially harmful”, nearly one-third (32%) encouraged viewers to put money into high-risk schemes but didn’t explain the potential downsides.

An antidote to predictions that don’t come true

Whether it’s current events, the weather, or financial markets, we’ve come to expect bold predictions on what’s going to happen – it gives us a sense of solid ground when things seem uncertain.

Many of us also enjoy a bit of drama – that’s why financial predictions often have to be overly optimistic or pessimistic – like the ‘out there’  TikTok fads or detox diets – to stand out. But this results in a lot of distracting noise.

As we said in our last article as financial planners, we prefer to focus on what we know is going to happen, or at least is very likely to. It may sound boring, but sitting tight and not overacting is the route to long-term investing success.

If you’d like to discuss this further, please get in touch with us.