Wall Street’s research departments include both equity strategists and equity analysts.
Strategists publish targets for stock markets as a whole from their big-picture analysis (i.e., top-down analysis).
Analysts publish price targets on individual stocks based on their analyses of the companies they cover (i.e. bottom up analysis).
Unfortunately, strategists’ expectations rarely line up with the aggregation of analysts’ expectations (you can derive analysts’ implied target for the S&P 500 by combining their price targets for the respective companies they cover).
Strategists and analysts, however, do agree that the market is heading up from here. From FactSet’s John Butters:
Industry analysts in aggregate predict the S&P 500 will see an 8.2% increase in price over the next twelve months. This percentage is based on the difference between the bottom-up target price and the closing price for the index at the end of March. Aggregating the mean target price estimates (based on company-level estimates submitted by industry analysts) for all 500 companies in the index, the bottom- up target price for the S&P 500 is 2026.40, which is 8.2% above the closing price of 1872.34.
Market strategists predict the S&P 500 will see a 5.3% increase in price over the next twelve months. This percentage is based on the difference between the top down mean target price and the closing price for the index at the end of March. Taking the average of the five index-level target price estimates submitted to FactSet by market strategists, the top-down mean target price for the S&P 500 is 1972.00, which is 5.3% above the closing price of 1872.34.
“Who will be correct?” asks Butters. “It is interesting to note that one year ago, both the industry analysts and market strategists underestimated the closing value of the market for the end of the Q1 2014 quarter. At the end of Q1 2013, the bottom-up target price (based on company-level estimates submitted by industry analysts) was 1677.20, while the top down mean target price (based on index-level estimates submitted by market strategists) was 1579.89. Compared to the closing price of the S&P 500 at the end of Q1 2014 of 1872.34, the industry analysts underestimated the price of the index by 10.4% one year ago, while the market strategists underestimated the price of the index by 15.6% one year ago.”
We should note that Butters’ report was published on Tuesday, and the S&P 500 closed at a record high of 1,890 today. So directionally, the analysts and strategists are already on the right track.
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