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Tackle Today: The Folly of Forecast

December 27, 2022

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«Wall Street nailed earnings in 2022, but that’s about it.»

Traders,

Forecasting the economy and financial markets is challenging. Even when you’re so right, you can be dead wrong. For instance, every year, Wall Street economists predict the cumulative earnings of the S&P 500. Most of the time they’re way off, and it’s an exercise in futility. Incredibly, 2022 was a year they got completely and totally correct. Though the final quarter has yet to complete, based on estimates, full-year earnings per share for the S&P 500 should tally to $221. One year ago, this was the exact prediction laid out by Wall Street’s wizards.

Impressive, most impressive. It’s the closest forecasters have come to forecasting earnings since the data started being compiled by Refinitiv in 1995.

And what, pray tell, was the prize for being so utterly spot-on?

Absolutely nothing!

Predicting earnings tells you nothing about how the stock market will react. No one expected a bear market. No one thought the Fed Funds rate would have ballooned from zero to nearly five percent. And no one anticipated the P/E ratio would dramatically shrink from 22 to 17. Keep this in mind next time you try to use Wall Street consensus in your trading.

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