For 2019, the S&P 500 has witnessed an increase in value of 26.4% (to 3168.57 from 2506.85) to date. Where do industry analysts believe the price of the index will go from here?
Industry analysts in aggregate predict the S&P 500 will see a 7.5% increase in price 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 as of yesterday. The bottom-up target price is calculated by aggregating the median target price estimates (based on company-level estimates submitted by industry analysts) for all the companies in the index. On December 12, the bottom-up target price for the S&P 500 was 3407.46, which was 7.5% above the closing price of 3168.57.
How accurate have the industry analysts been in predicting the final value of the S&P 500?
Over the previous 15 years (2004 – 2018), the average difference between the bottom-up target price estimate at the beginning of the year (December 31) and the final price for the index for that same year has been 9.0%. In other words, industry analysts on average have overestimated the final price of the index by about 9.0% one year in advance during the previous 15 years. Analysts overestimated the final value (i.e. the final value finished below the estimate) in 12 of the 15 years and underestimated the final value (i.e. the final value finished above the estimate) in the other 3 years.
However, this 9.0% average includes one year (2008) in which there was a substantial difference between the bottom-up target price estimate at the start of the year and the closing price for the index for that same year (+92%). If the year 2008 were excluded, the average difference between the bottom-up target price estimate one year prior to the end of that year and the closing price of the index for that same year would be 3.1%.
If one applies the average overestimation of 9.0% to the current 2020 bottom-up target price estimate (assuming the estimate changes little between now and December 31), the expected closing value for 2020 would be 3100.60. If one applies the average overestimation of 3.1% (excluding 2008) to the current 2020 bottom-up target price estimate, the expected closing value for 2020 would be 3302.46.