Nobody Knows Anything

The season of sell side year-ahead investment outlook reports

The screenwriter William Goldman wrote Butch Cassidy and the Sundance Kid, the Princess Bride, All the President’s Men, and many other hits. But he is remembered today for his critique of the Hollywood studio system and their ability to pick winners. He famously said, “Nobody Knows Anything,” which is just as relevant to any creative or innovative endeavour as it is to the movie industry. If only a major investment bank would publish a one-pager with those three words!

One of my pet frustrations around this time of year, when I was a research analyst was the congestion caused by the year-ahead outlook pieces. This is also the time of year when you realize how many strategists and economists the investment bank you work for has. There would be hundreds of pages from the multi-asset strategist, equity strategist, economists of every jurisdiction under the sun, and eager stock research industry coverage teams. The editorial team is more of a back-office function in research departments and not like a newspaper where they are picking and shaping the content, but they would still be jammed up and unable to edit anything else apart from year-ahead pieces. The morning meeting with the salesforce would get jammed with all these year-ahead pieces and the inboxes of clients would be spammed full of them.

Full disclosure it has been more than a decade since my last sell-side research report and industries change. But some things never change!

Only a few days ago, Forbes published their annual 30 under 30 list. Hard to know if they are brave or just tone deaf as this is the list that was home to Sam Bankman-Fried, Caroline Ellison, Elizabeth Holmes, Martin Shkreli, Charlie Javice, and most recently Joanna Smith-Griffin who was caught by the authorities a few days ago for having defrauded her investors to the tune of $10 million of funds that were supposed to go to her startup. At least the Forbes list throws off useful signals i.e. if these were CEOs of listed companies, hedge funds could go and short them.

But working your way through the forest of sell-side year-ahead outlook pieces is messy. It is a little like the inverse Cramer meme. CNBC’s talking head Jim Cramer once said to Forbes 30 under 30 winner Theranos founder Elizabeth Holmes “I compare you to Steve Jobs and what he did for computing. I regard you as a Visionary Next Generation person.” He is also known for his bad stock recommendations so much so that the curse of Jim Cramer is like the curse of Forbes 30 under 30. The inverse Cramer (i.e. you should sell stocks that Cramer is buying and vice versa) became so much of a social media phenomenon that an ETF was created to track it. However, what the ETF managers found was the huge number of recommendations Cramer was making, and sometimes with different language was making it hard to create a model portfolio that was accurately tracking this. In the end, the inverse Cramer fund struggled to create alpha albeit neither did a long Cramer fund.

So, what are the main challenges with year-ahead outlooks?

There is just so much of it.

Year-ahead pieces were common when I started in the business in the late nineties, and a few major Wall Street banks were producing them as far back as the seventies. But the sure quantity continues to increase. Given the collapse of demand from the buy side to pay up for stock research, sell-side research is even more of a marketing tool for the whole bank including wealth management, investment banking, and other divisions and these year-ahead big picture pieces tick that box. With consolidation on the buy side and in the advisory space, the trillion-dollar asset and wealth managers are also producing more glossy year-ahead pieces themselves. Bloomberg estimated that last year Wall Street analysts produced more than 650 different year-ahead outlook pieces.

They are not clear and concise.

Wall Street analysts love writing tomes for their outlook pieces with lots of verbose language to illustrate how they are intellectuals and not salespeople. When these reports convey a simple point, it is often too generic to be actionable for an investor like some broad murmuring about the government debt levels, inflation risks, or geopolitical tensions that lie ahead without specificity. There are even firms that cover their bases with bull and bear cases. I have a good friend who went to quant research, did a PhD in natural language processing, and spent the last decade training algorithms to look for buzzwords in these reports (as well as company transcripts) and he struggled with the low signal to noise ratio

Thematic research is eating the world.

Everyone is now a thematic expert. Given the way that technology and many themes go across industries, it makes sense that thematic research has risen in importance. In recent years the mega-trends whether it was Generative AI, crypto, or private credit were huge. Hence, don’t just expect strategists to make predictions of year-end 2025 target levels for the S&P500, FTSE100, and other indexes but expect tomes of colourful language and random assumptions on the impact of the AI boom. At least the ESG grifters are gone for now. The value added with themes is of course how and when to play them and predicting where we are in the Gartner hype cycle of technology adoption can be a fool’s errand. The two great thematic investing gods Masa Son of SoftBank and Cathie Wood of ARK after all saw the AI boom and owned Nvidia years ahead of the current boom and sold the stock cheaply, while it was the macro trader Stanley Druckenmiller who bought Nvidia shares just as the AI boom was picking up.

Finally, does the world change on December 31^st?

Many of these year-ahead outlook pieces are so long that they were written long before the year-end and things can shape up differently. The last Federal Reserve meeting in mid-December has often been an important one. More importantly, look at recent years and your library of year-ahead pieces would have been irrelevant when Covid 19 hit or after Russia invaded Ukraine. A different year-ahead piece would be needed almost immediately.

Next year, Wall Street should get ChatGPT to do their year-ahead outlook pieces. That is assuming some junior analysts didn’t use it this year without telling their bosses that put their name on the top of the reports but probably only wrote the introductions and main section.