(Bloomberg Opinion) – Piper Sandler & Co. is eliminating its price target for the S&P 500 Index. Its Wall Street counterparts should follow suit.
Financial services The firm's chief investment strategist, Michael Kantrowitz, said that because the market's performance was being driven by a handful of overweight stocks, index targets were no longer useful, as Alexandra Semenova of Bloomberg News reported last week. He said it would be more useful and efficient to focus on individual stock forecasts for a handful of large, idiosyncratic companies that are driving performance.
Indeed, the top 10 companies now account for about 38% of the weighted index and have taken an even larger share of earnings. While the gauge has returned 18% this year, it average Shares in the basket of US large-cap stocks have returned less than 5%.
Kantrowitz made the right decision, but I suspect the targets have been useless for much longer than he admits.
Kantrowitz is bound to face criticism that he is changing a game he has struggled to play. He started lowering his price target a bit late in 2022 (as most prominent strategists did, frankly) and then remained one of the most outspoken bears throughout the monster rally in 2023. As for his reasoning for this market movement, concentration and correlation are CONTINUALLY in flux; that's the nature of the beast, and strategists must work with the hand they're dealt.
But it's the price targets themselves that are the real problem, not the 2022-2024 market. As I have documented forward, strategists' targets imply a false sense of precision and routinely lead investors astray. The average strategist in the Bloomberg survey often gets the right markets right, but not much else (not much of an accomplishment in a market that's usually rising). The average score at the beginning of the year regularly misses the actual score by a wide margin.
Moreover, if you were to closely track changes in the consensus price target and trade it actively, selling whenever the index rose above the target and buying when it fell below, history shows that you would under -reliable reformation a simple purchase and- keep the strategy. Bottom-up price targets are also reliably unreliable.
I don't blame strategists for failing at an impossible task. I constantly learn from their nuanced work on sectors, styles and market regimes, but I suspect most of them know that index targeting is a bogus task. Most of them coalesce—knowingly or unknowingly—around “safe” estimates that defy the true range of possible outcomes. Kantrowitz has gone out on a limb with his calls and deserves credit for it. The same goes for Marko Kolanovic, JPMorgan Chase & Co.'s former chief global market strategist and co-head of global research, who has been the target of free jabs on social media since he left firm after several difficult years. Kolanovic, an obviously brilliant guy with a Ph.D. in theoretical physics, he was known as “Gandalf” until his crystal ball apparently shattered in 2022. But to his credit, he continued to swing for the fences until his exit.
Index targets have been around for decades, and they often generate significant news coverage when they are released or reviewed. For many, they represent a tantalizing data point that seemed to answer the question: What is the conclusion of all this research?
But Piper Sandler's Kantrowitz isn't the first prominent Wall Street voice to abandon them. Tony Dwyer, formerly of Canaccord Genuity LLC, dropped targets for the S&P 500 in 2020, according to Bloomberg's Lu Wang reported in that time.
In a sense, the debate about price targets parallels what is happening in global central banking circles. The Federal Reserve and other central banks issue closely watched projections about the economy and policy rates, but there has been enthusiasm for a PrOPOSAl by former Fed Chairman Ben Bernanke to present scenarios instead of simple estimates. Like S&P 500 targets, I would argue that those projections convey false precision, even coming directly from policymakers at the head of the most powerful institution in global finance.
Personally, I like the idea of scenarios. They help the public better assess the landscape of risks and benefits. But they also present unique challenges and must be done FAIR way. Like point estimates, scenarios assume a certain amount of human foresight and, in reality, sometimes it's the scenarios we can't imagine that move the markets the most.
Strategists and economists will face difficult choices—and a lot of trial and error—in deciding how many scenarios to present. Too much and you confuse the audience; too little and you're oversimplifying the situation. What if audiences fixate on the most extreme and dramatic outcomes and pay for the most likely ones?
In my opinion, these are risks worth taking in stock market analysis, because the plain vanilla index target has not served the investing public very well, and Piper Sandler is right to give it the ax. The world is an uncertain place, and we'd all be better off—strategists and their readers—if we stopped pretending we could predict the future to the exact index point.
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