One of the annual rituals on Wall Street is analysts revealing their forecasts for the S&P 500 (NYSE: SPY) for the following year. Of course, the exercise is more about tradition rather than substance due to the difficulty of these projections given the variables, potential for 'black swans', and dynamic, unpredictable nature of markets.
In some years, most of the projections fall into a narrow band. This type of herd-seeking behavior is common in many professions as they won't be punished for a forecast that is wrong but reflects consensus, while they would likely face some repercussions if the forecast is wrong and out of consensus.
An example in another industry of this phenomenon is that "you can never go wrong with IBM (NYSE: IBM)" in the 70s and 80s in that a manager would never be fired for picking IBM as its IT or PC choice but could get fired for picking a small or obscure company even if that company offers better products or prices.
This year, the band is a bit wider than usual possible due to the large variance in terms of forecasts for inflation, rates, and earnings. The lowest forecast is 4,400 from Morgan Stanley (NYSE: MS) and the highest is 5,500 at BMO (NYSE: BMO).
Here are some of the most interesting forecasts:
LPL Financial (NASDAQ: LPLA) is forecasting that the S&P 500 will be fairly valued between 5,000 and 5,100. It comes to this figure with an EPS estimate of $235 and a P/E of around 21.
Credit Suisse (NYSE: CS) has a 2022 year-end target between 5,000 and 5,200. It sees the major drivers of gains being earnings growth in real and nominal terms, increased margin expansion for cyclical, share buybacks, and continued support from monetary policy.
Goldman Sachs (NYSE: GS) has a target of 5,100. It sees some headwinds as being decelerating growth, a hawkish Federal Reserve, and rising real yields which should depress returns. 8% is the average return in an environment of rising yields and slowing growth.
Morgan Stanley is most bearish at 4,400. It sees some headwinds as being tightening financial conditions and slowing earnings growth which has made the risk/reward for equities less appealing. However, it sees many opportunities for stockpickers given strong economic growth.
BMO is at the high end with its forecast of 5,500 which was increased from 5,300 previously. It sees the Fed remaining accommodative, inflation peaking, supply chain issues improving, and positive earnings growth as bullish catalysts for stocks.