Nobody Knows Anything Part II

How are those sell side year-ahead investment outlook reports looking now?

If you were to summarize the slew of sell-side year-ahead investment outlook reports that were probably written in October but dropped in your inbox in early December it would probably be….the trend is your friend/ride your winners rather than mean reversion. Since I wrote on this topic late last year in Nobody Knows Anything a lot has happened. We are exactly three months on so let’s take a pause and look at what was expected and how it has panned out so far.

Any good investment strategist, economist or futurist to use the tech bro version is good at making bold predictions but also quietly hedging their bets. A generic footnote such as “there may be market volatility, uneven growth, or uncertainty” is always useful.

But the general thrust of the thousands and thousands of pages of 2025 predictions was calling for more of the same. US stock market exceptionalism would continue driven by the pro-business friendly, animal spirits of the Trump administration and huge productivity gains from AI. Tech stocks could continue to lead the way. There were generic warnings that there could be risks from trade, tariffs and stagflation but overall, the skies were clear and the US was the only game in town. There would be materially faster economic growth in the US and a much better stock market performance.

Europe, the sick man of the world economy wouldn’t take its medicine and continue to underperform in growth and stock market performance. Moreover, if anything slowing growth in China and a trade war was a downside risk for the European economy and stock markets with the US an island of relative calm.

The main change in stock market expectations was not geographic but that small caps would finally join the party buoyed by the Trump pro-business policies. US investment bankers were salivating with the anticipation of pent-up demand for IPOs and M&A. This surge would be combined with less regulation and lower capital requirements for banks. Senior bankers all ran on TV to talk up the incoming administration. Big bank share prices continued to skyrocket into early 2025.

So how has the price action looked over the last 3 months?

The S&P500 is marginally down, the Nasdaq is around 8% and the Russell 2000 index of US mid-cap stocks is down 15%. By contrast, European stock markets are flying. The STOXX 600 European index is up around 10%, the FTSE100 is up more than 5% and the DAX30 of German large-cap stocks is up 15%.

What happened to Europe being a “selective stock-pickers” market? Well, I guess that could have been a reference to buying defence stocks, but I didn’t read any year-ahead investment outlooks talking about a potential surprise German fiscal stimulus, let alone European rearmament. The Atlanta Federal Reserve’s real-time GDP forecasts are notoriously volatile and tend to correct through the quarter so should be taken with a pinch of salt but it is worth noting the massive deterioration in recent weeks: Atlanta Fed.

Where the year-ahead outlooks look more on the ball is on US bond yields. The consensus was for 10-year US interest rates to end 2025 at 4.14% which is not too far from where we are currently. But as Bryce Elder noted in A guide to 2025 investment outlooks by someone who hasn’t read them the range of estimates here is between 3.55% at the low end and 4.7% at the high end, so all over the place.

In “Nobody Knows Anything” I noted: “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.”

When you look at the journey of US bond yields this year, the mid-December 2024 Fed meeting did indeed surprise and interest rates rose much more sharply than expected but have come down in recent weeks…. Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis (DGS10) | FRED | St. Louis Fed. Moreover, no investment strategists were predicting a massive step up in German bond yields. The change in the spread between US and German bond yields caught most market strategists off guard.

Are year-ahead investment outlooks useful?

In late December, Robert Buckland an accomplished and well-respected strategist gave a passionate defence of the value of these pieces in the FT with some fair points that they help the strategist reassess their data and that they are a door opener for investor meetings: In defence of the annual outlook. I guess he read my early December piece as he refers to the William Goldman quote, I used.

On 3^rd January investment strategist Joachim Klement updated his analysis from the prior year illustrating both the divergence between the expectations of bottom-up stock analysts and strategists, but also how bad both sets of market experts continue to be at forecasting index levels. Perhaps the only consistency is that Wall Street strategists seem to miss every year for the last 20 years. There is a chart in Joachim’s substack piece using Bloomberg data that illustrates this well… Let me fix those forecasts for you - by Joachim Klement

The ever-wise Jason Zweig who writes the Wall Street Journal’s The Intelligent Investor column followed up on this data in this piece… How You Can See Through Wall Street’s Ritual of Wrong - WSJ. In his view: “You probably already know that this annual forecasting ritual is absurd. What you might not realize is that it’s also toxic.” He ties this to the breakthrough work that psychologists Daniel Kahneman and Amos Tversky did on anchoring decades ago. The idea is that once a high-profile financial influencer type predicts a certain increase in an asset price whether it be stocks, bonds or bitcoin “these numbers lodge unconsciously in your mind and your own estimates gravitate toward them, whether you realize it or not.”

Let’s hope too many active fund managers and hedge funds were not anchored by Wall Street year-ahead investment outlooks this year!