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S&P 500 is more likely to fall to below 5500 or rise above 7100: BCA

Published 2024-12-17, 05:30 a/m
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Investing.com -- The S&P 500 is more likely to drop below 5500 or rise above 7100 than remain within the range of consensus forecast in 2025, according to BCA Research.

The firm believes that the range of forecast for the equity index is “too narrow.”

The range of predictions for 2025 across sell-side strategist targets cluster around an average 10% total return, assuming the index ends 2024 at 6040. BCA, however, stresses that average outcomes in equity markets are rare.

“Only in about four out of 10 years have returns been within the range that all sell-side firms are projecting for next year,” strategist Juan Correa said in a note.

“While most strategists are predicting an average year for the S&P 500, average returns do not happen often.”

This conclusion is backed by historical data. Since 1926, S&P 500 returns have frequently deviated from the “average” range. If outliers are excluded, the probability of returns falling within the consensus drops to just 17%.

“Almost all the major sell-side firms are herding around a range that has occurred in less than 1 out of 5 years,” BCA adds.

BCA also highlights that annual earnings per share (EPS) growth forecasts for 2025, ranging between 4% and 19%, fail to capture the historical volatility of earnings.

When compared to the actual distribution of EPS growth since 1926, the current forecasts only account for roughly 40% of realized outcomes. Similar narrow expectations apply to changes in valuation multiples, which historically have been far broader.

Commenting on the tendency for strategists to converge on moderate targets, Correa notes that this approach may appear prudent for managing risk, but it often stems from the “safety in numbers” mindset.

“The industry is particularly punishing when you get something wrong that others did not. It is much safer to be somewhat wrong with others than be clearly wrong by yourself,” the strategist said.

Ultimately, BCA contends that extreme outcomes are far more probable in the year ahead. “We believe that most S&P 500 targets for 2025 will probably be way off. As a result, our negative view will either be spectacularly right or spectacularly wrong,” the report concludes.

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