Forecasting Markets & Stocks

Introduction to forecasting markets

In a world with vast amounts of information on tens of thousands of stocks and investment funds, private investors want to invest profitably without spending a lot of time on selection. One avenue at offer is to rely on analysts and pundits to foresee the stock price. I will be taking a look at the empirical data and also offer some advice to take matters into your own hands.

Main

Forecasting is an attempt to look into the future. Forecasting is probably as old as mankind is. I am thinking about the Oracle of Delphi. Or I remember the movie "Troy" where the king consults the gods before deciding to go to war. With investing it´s about guessing whether your investment is going to be profitable or not. So the idea remains the same but the field of application changes: from politics and warfare to investing and business. When you want to foresee the future in investing various models can be applied to do so: very sophisticated ones like in the title picture shown containing many variables on business, economic or financial factors. Or the model can be very simple. The key question does not change though: does the model work??

Empirical data: I found this graph in  an article in the Financial Times, called “never ever make predictions”. On this graph you see the various forecasts for the US stock market index S&P 500. Analysts from 11 international banks shared their predictions for the S&P 500. You also see the actual performance of the S&P 500 for each year starting in 2015. Three remarks: first, you see none of the forecasts matched the actuals for any of the years up to 2024. Second, actual performance often deviated by a lot from all forecasts: look at the years 2020 - 2024. Third, forecasts often were close to each other: 2016 - 2018 or 2020. In the same article I also read forecasting interest rates isn´t accurate either. I found in an article from Investopedia that around 30% of the forecasts are accurate within a 12-18 months period.

If you want to know for yourself, you will need to find out by doing some work. I suggest to do your own research on the stocks you are interested in. Pick your stocks. Then find an analyst who covers your stocks. Often one stock will be covered by several analysts. The estimates will vary. This is the result of each analyst weighting the variables of a model differently. You don´t have to pay anything for the estimates, they are free of charge.

Warriors awaiting the message from the Oracle of Delphi.

Next, track the forecasting performance. 1) Take a note of the forecast. 2) Check after 6 to 12 months and note it in an Excel sheet. You can buy some small amounts of those stocks to make it more interesting. With time you can add more stocks or analysts to your portfolio track list.

Summary

Advice on the financial markets is plenty and fore free. Analysts employed by banks provide stock price forecasts. While it´s advantageous the advice is for free it´s decisive to know if the advice at offer is also good. Research presented from 2 articles reveals in the best case scenario it´s a minority of forecasts which turn out to be accurate. This is bad news. Hence, investors who blindly trust forecasts put their money at risk. A safer path is when investors do their own research. I offered a simple way to perform your own research so you filter poor from good forecasters. At the end even while forecasts are for free, an investor must spend some time to find the good forecasters.

Sources:

Never Ever Make Predictions (Financial Times),

https://www.ft.com/content/3e928a47-a6f0-4e0a-9bb4-3e7dbc749ece

How to Understand and Calculate Stock Price Targets (Investopedia),

https://www.investopedia.com/terms/p/pricetarget.asp

Pictures: Financial Times and shutterstock.

 Frequently Asked Questions (FAQ)

1. Are stock market forecasts reliable?No. Studies show that less than one-third of forecasts are accurate within 12–18 months.

2. Why do forecasts often fail?Because markets are influenced by unpredictable events, model limitations, and analyst biases.

3. Should private investors trust analyst forecasts?Not blindly. Use them as input, but always cross-check with your own research.

4. How can I track forecast accuracy myself?Keep a record of predictions in Excel, then compare them with actual results after 6–12 months.

5. Is forecasting still useful?Yes—if combined with your own analysis. It helps you identify which analysts provide more reliable insights.