2021 Predictions: Can You Trust Wall Street’s Outlook for the New Year?

For thousands of years, people have kicked off the New Year with resolutions.

During the Babylonian times, these resolutions were as simple as returning borrowed items or paying their debts. The Romans made sacrifices to Janus, the god of doorways or beginnings, and promised better behavior in the New Year. And Christians back in the mid-1700s considered their past behavior and mistakes, resolving to make better decisions in the coming year. [1]

The practice of New Year’s resolutions has undoubtedly evolved over the years. Today, we’re more familiar with setting self-improvement goals for the New Year, whether to exercise regularly, eat better, read more books, spend less time on screens and more time with family and friends, or improve financial situations.

The latter drives market pundits, investment managers, and well-known investors to provide their predictions for the upcoming year. Everyone has an opinion on where the stock market is headed, and they’re more than willing to share their two cents on how you can profit from it.

But here’s the question: How accurate are these market predictions?

No one has a crystal ball, and no one can predict with 100% accuracy where the stock market or economy is headed in a New Year. Not even the Oracle of Omaha bats a 1,000. (Remember when Warren Buffett was bearish on technology companies and passed up the early opportunity to invest in Google (GOOG) and Amazon (AMZN)?)

Buffett isn’t alone. Plenty of Wall Street’s predictions are inaccurate. And we don’t need to look any further than 2020 for proof.

Consider a few predictions from the beginning of 2020: The Motley Fool predicted that the Federal Reserve would stand pat throughout the year. Wells Fargo felt an economic recession was out of the question. And several analysts—JPMorgan, Oppenheimer, and Piper Jaffray—anticipated that the S&P 500 would end the year between 3,400 and 3,600.[2]

Well, the Fed did not stand pat in 2020. The central bank slashed key interest rates to near-zero levels and has stated these ultra-low rates will persist through 2023. The U.S. economy slipped into a recession as the COVID-19 pandemic spread, and lockdown restrictions halted commerce and squashed consumer confidence. And, while the optimistic outlook for the S&P 500 wasn’t entirely wrong, the index rallied more than 16% in 2020 and ended the year at an all-time high of 3,756.

Still, Wall Street is not deterred. New Year predictions are a dime a dozen right now.

A recent article from CNBC revealed 2021 predictions from 20 analysts at major financial institutions. Most aren’t only providing rosy outlooks; they’re making wildly optimistic predictions. CNBC reported that 12 of the 20 analysts are looking for the S&P 500 to soar up to between 4,000 and 4,500 in 2021.[3] That represents a 6.5% to nearly 20% increase from the December 31, 2020 closing price.

Goldman Sachs is forecasting the S&P 500 to end the year at 4,300. However, Morgan Stanley, Wells Fargo, and LPL Financial are much more conservative in their views for the year. All three expect the S&P 500 to end 2021 at 3,900.[4]

Interestingly, the financial data provider FactSet recently revealed Wall Street analysts overestimate yearend price targets for the S&P 500 80% of the time. Or, in other words, 12 out of the past 15 years.[5]

Another projection for 2021: Corporate earnings will improve significantly. FactSet estimates that calendar year earnings will soar more than 22%.[6] Wells Fargo and LPL Financial are even more optimistic. Both firms are forecasting that the S&P 500’s earnings will surge 30% in 2021.

The final earnings results for calendar year 2020 aren’t in yet, but earnings results were pretty dismal in the second and third quarters of 2020. FactSet estimates that the S&P 500’s 2020 earnings will show a 13.6% decline. So, most analysts feel that there is only one way for earnings to go in 2021, up.

But again, no one has a crystal ball to pinpoint the corporate earnings environment in the New Year accurately. At the end of 2019, FactSet forecast that the S&P 500 would achieve a 9.6% earnings growth rate in 2020. Clearly, that didn’t happen.

Now, I’m not trying to be a Negative Nelly. I simply want you to take all of the recent market predictions with a grain of salt. In our opinion, one of the biggest mistakes that investors can make is adjusting their investment strategy based on others’ outlook for the economy, stock market, and individual stocks in the New Year. I urge you not to fall into this trap. When you let others’ predictions influence your investment decisions, you could derail a sound investment strategy and hurt your chances of reaching your financial goals.

Please click here for important disclosures.

[1] https://www.history.com/news/the-history-of-new-years-resolutions

[2] https://www.yahoo.com/now/wall-street-strategist-forecast-for-sp-500-in-2020-211002824.html

[3] https://www.cnbc.com/2020/12/08/stock-market-strategists-see-sp-500-at-4000-4500-in-2021.html

[4] https://www.forbes.com/sites/jonathanponciano/2020/12/21/stock-market-2021-outlook-goldman-sachs-morgan-stanley/?sh=5f00cc085afd

[5] https://www.cnbc.com/2020/12/21/wall-street-makes-a-big-sp-500-call-for-2021-history-says-ignore-it.html

[6] https://insight.factset.com/sp-500-cy-2021-earnings-preview-largest-yoy-earnings-growth-since-2010