Welcome to Wall Street.
The following is repurposed from Peltoma's 2025 Market Forecast Letter, 1/2/2024.
Capital Market Expectations (CME) are the building blocks for quality investment decision-making.
At investing’s most basic level, there are (1) the risk-free assets that come with 100% predictability of future outcomes, and (2) the riskiest assets that come with 0% predictability of future outcomes.
All investments lie on a predictability spectrum, with most somewhere in between these two points.
Investors should demand higher expected returns for accepting higher unpredictability. Executed properly – the more time invested, the better chance that higher expected returns actually manifest into higher realized returns (i.e. taking risks pays off). Over short time horizons, though, risk assets are highly unpredictable and often frustrating.
Having well-calibrated, long-term expectations – CME – is a critical part of a successful investment experience.
But for the past month, financial institutions have published their 1-YR forecasts for 2025 stock market performance. These are unfounded short-term guesses, whereas CME relates to longer-term asset class expectations (which even for riskier assets, as described, can become more reliable) and thoughtfully informed, can help guide investors to how we expect a portfolio to likely grow over time.
Understanding what types of investment returns can/should be forecasted over any time period is complex, because both the (1) expected variability of an asset, and any (2) maturity date of an asset, matter. That's why I can forecast that my daughter's hair color will likely be blonde next year (she is blonde, and two), or that if she goes to college it will most likely be around age 18...but I wouldn't forecast which college (or what her hair will look like then!).
Stocks don't have maturity dates (you own them until you sell them), and all have risk. Conversely bonds mature, and some bonds are even risk-free (Treasurys), and as such you can find a risk-free bond that matures exactly in 1-YR, meaning you can know ahead of time your precise 2025 return (4.159% as of earlier today). So not all forecasting – even over short time horizons – is necessarily silly or misguided. But much of it is.
Annual stock market forecasts are a sad, legacy Wall Street tradition.
No one, no one, no one – has any clue how the stock market will perform in any given year, nor is it necessary to make outlandish forecasts in order to have a successful investment experience.
Here is an analysis of stock market forecasts vs. actual returns going back to 2000, which will lend readers to think not, What do these experts have to say? but instead, Who the hell do these people think they are fooling?
Teams of Wall Street analysts cluster together, share ideas and opinions, and create these 1-YR forecasts in seriousness. But it is a joke. And I would encourage readers to recognize that one reason the forecasts look so similar to each other (and we so frequently see that the realized return is outside the band of the entire cohort of forecasts!)...is because there is business risk in looking different than competitors and being wrong, but less risk in being wrong when all your competitors are wrong, too.
Alas, here are the annual, time-honored, 2025 stock market forecasts:
Notice the clustering. Notice only positive expected returns.
This is a marketing scheme disguised as investment research.
As a counter to this annual charade, but in seriousness, below we share a snapshot of Peltoma’s 2025 forecasts. This is thinking that actually informs client portfolio design and implementation. Our forecasts, you'll note, are comically wide compared to large Wall Street banks, but we'd argue the joke isn't on us. This is sensibility.
[Note that this simplifies our actual work; CME is more complex than just 1-YR return forecasts and requires inputs related to asset volatility and correlations.]
Peltoma is proud of our unwillingness to forecast the unforecastable, and encourage more firms to do the same.
Investors who concern themselves with guessing the short-term returns of risk assets will inevitably be disappointed. And if you believe what the late NPR Car Talk host Tom Magliozzi once said, that happiness is simply reality minus expectations – then as investors, we should calibrate accordingly.
Given the extreme historical volatility of stocks and many alternative assets over 1-YR periods, we should delineate which asset classes are simply too unpredictable to even try, and where such attempts typically (mis)lead investors to worse outcomes rather than better.
And then other, less volatile assets, where an educated guess may be not just reasonable, but highly useful.
End.
Reference indices for long-term CME: Russell 3000 (US Stocks), MSCI World ex-US (International Developed Markets Stocks), MSCI Emerging Markets (Emerging Markets Stocks), FTSE EPRA Nareit Global REITs (Global Real Estate), ICE 0-3 Month Treasury Index (0-3 Month Treasury Bills), 1 Year Treasury Bill Rate (1-YR Treasury Bills), Bloomberg U.S. 1-5 Year Government/Credit Index (Short-Term Bonds), Bloomberg U.S. Aggregate Index (Intermediate-Term Bonds), Bloomberg U.S. Long Treasury Index (Long Term Treasury Bonds), Bloomberg Global Aggregate Bond Index (hedged to USD) (Global Intermediate Bonds), Consumer Price Index (U.S. Inflation). 1-YR treasury yield cited from CNBC on 1/1/2024.