Confident analysts often miss the mark

As we approach the final month of the year, Wall Street’s top strategists are revealing their forecasts for 2026, complete with confident predictions about where the S&P 500, which represents the US stock market as a whole, is expected to head.

Before you adjust your portfolio based on what they say, consider this: They’ve underestimated market returns in six of the past eight years — often by double digits.

Yet every December, the same ritual is repeated: new forecasts are delivered with the same certainty, and investors continue to listen. Why do those with so much experience and so much data keep getting things wrong, and what should this tell you about how to invest?

Why do professional forecasters make more mistakes than they get?

Heading into 2024, the average estimate called for a 9% market gain. In fact, the S&P 500 returned 25%. previous year? Analysts expected an increase of 6.8%. The index rose 24.2%. In 2021, Wall Street expected growth of just 1.2%, and got 26.9%. With one month left until 2025, the market has already exceeded experts’ expectations for this year by more than 5%.

It’s not just stock market forecasts. Economic forecasters – including those whose models shape Wall Street’s forecasts – have a similar record.

A Federal Reserve review of professional economic forecasts going back to 1993 found that real GDP growth fell within their forecast ranges less than half the time — worse than a coin flip. Inflation expectations performed slightly better at 56%, but this still means they were wrong in more than half of the cases.

The Fed’s track record isn’t much better. Between 2012 and 2020, FOMC participants continued to expect higher inflation than actually occurred. Then, when inflation rose in 2021, they didn’t expect it with prices hitting 40-year highs.

If the institutions that set monetary policy are unable to reliably forecast the economy, it is not surprising that analysts who base equity forecasts on top of those assumptions remain missing as well.

The Confidence Trap: When certainty sells better than truth

It’s not that analysts are bad at their job, it’s that they are trying to predict something that is often fundamentally unpredictable. No model could have predicted the disruptions that tariffs would impose in 2025 and then be halted again, or the 2020 pandemic and subsequent market collapse. Markets respond to policy decisions, geopolitical shocks, and shifts in unpredictable sentiment.

The bigger question is why so many investors treat these forecasts as if they were maps of known terrain. Researchers have found that overconfidence leads investors to over-trade, overestimate their judgments, and place too much trust in experts who appear confident.

Confirmation bias exacerbates the problem. Investors often look for forecasts that match what they already believe, ignoring analysts who contradict their forecasts. Herd behavior, which occurs when everyone follows the same consensus, makes doing anything different risky.

What works when expectations fail?

Confident forecasts can encourage reckless trading behavior, including chasing hot sectors, foregoing diversification, and trying to time the market. Certainty sounds reassuring, but it is the enemy of maintaining a long-term strategy.

So what should you do when you plan for 2026 and beyond?

• Make sure you are diverse: Avoiding investing heavily in trendy sectors is essential, as few analysts have demonstrated a long-term track record of picking sectors that will outperform. New research from Morgan Stanley has updated the classic advice that spreading investments across different asset classes improves returns, especially since stocks and bonds don’t always move in opposite directions. Index funds give you instant diversification without betting on any one forecast.
• Average cost in dollars: This means investing the same amount at regular intervals, thus removing the guesswork completely. Most importantly, it removes the temptation to time the market based on Wall Street’s forecasts for the coming weeks, months, or even year each time.