Most of Wall Street’s research departments include equity strategists and equity analysts.
Strategists publish targets for the stock markets as a whole from their big picture analysis (i.e top down analysis).
Wall Street’s equity analysts publish price targets on individual stocks based on their analyses of the companies they cover (i.e. bottom up analysis).
As it happens, strategists’ expectations rarely line up with analysts’ expectations (You can derive analysts’ implied target for the S&P 500 by combining their price targets for the respective companies they cover).
However, you might expect their forecasts to at least go in the same direction.
Unfortunately, that’s not the case right now.
According to forecasts compiled by FactSet, strategists currently expect the S&P 500 to head lower 1,579 in twelve months. Meanwhile, analysts expect stocks to go up to 1,724.
This is probably very confusing, if not angering, for investors seeking guidance from Wall Street.
Here’s a chart from FactSet’s John Butters:
From FactSet’s John Butters (emphasis added):
Industry analysts in aggregate predict the S&P 500 will see a 5.6% increase in price in 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 on May 8. 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 was 1724.42 on May 8, which was 5.6% above the closing price of 1632.69.
Market strategists, on the other hand, predict the S&P 500 will see a 3.3% decrease in price on average 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 on May 8. Taking the average of the eight index-level target price estimates submitted to FactSet by market strategists, the top-down mean target price for the S&P 500 was 1579.28 on May 8, which was 3.3% below the closing price of 1632.69.
Who will prove to be correct? It is interesting to note that one year ago, the industry analysts were much more accurate in their projections for the closing price at the end of April 2013 than the market strategists. At the end of April 2012, the bottom-up target price (based on company-level estimates submitted by industry analysts) was 1567.34, while the top down mean target price (based on index level estimates submitted by market strategists) was 1418.33. Compared to the closing price of the S&P 500 at the end of April 2013 of 1597.57, the industry analysts underestimated the price of the index by just 1.9%, while the market strategists underestimated the price of the index by 11.2%.