Last week, Wall Street began circulating their outlooks for the stock market in 2025.
As TKer subscribers know, I’m not crazy about taking these price targets too seriously. Sure, I keep an eye out for these targets (see here, here, and here). But I’m far more interested in the rigorous research behind these predictions. That’s because much of the underlying data and analysis that go into these calls is high quality and very insightful.
While it’s been the case their year-end price targets have been way off on the conservative side, strategists have actually nailed one important prediction: 2024 earnings.
According to FactSet, after three quarters worth of reported earnings, 2024 EPS is on track to be $240. That is to say, the consensus midpoint EPS estimate has been off by what amounts to a rounding error.
“Wall Street analysts have been reasonably good at predicting forward year earnings over the last few years,” wrote Nicholas Colas, co-founder of DataTrek Research.
If the earnings have been coming through, then why have strategists been so off with their price targets?
As we discussed in the May 24 TKer, assumptions about valuation multiples are where Wall Street’s calculations often go wrong.
Today, the forward P/E is about 22x. At first glance, the difference between 19x and 22x might not seem like much. But when you actually apply it to an EPS estimate, the range of S&P price scenarios can be wide. For example, here’s what the price scenarios look like assuming $275 EPS (which is what the consensus is expecting for 2025):
Differing assumptions about valuations are often why price target calculations vary, and inaccurate assumptions about valuations are why those targets almost always go wrong.
For long-term investors in the stock market, I don’t think it’s a good use of energy to obsess over exactly where the stock market might be exactly one year from now — especially since no one has figured out how to do that accurately and consistently.
