Piper Sandler & Co. is eliminating its price target for the S&P 500 Index. Its Wall Street counterparts should follow suit.
The financial services firm’s chief investment strategist Michael Kantrowitz said that because the market’s performance was being driven by a handful of heavily weighted stocks, index targets were no longer very useful, as Bloomberg News’s Alexandra Semenova reported last week. He said it would be more helpful and efficient to focus on individual stock projections for the handful of large and idiosyncratic companies that were driving the performance.
Indeed, the top 10 companies now make up about 38% of the index by weighting, and have accounted for an even larger share of gains. While the gauge has returned 18% this year, the average stock in the basket of large-cap US stocks has returned less than 5%.
Kantrowitz made the right decision, but I suspect that the targets have been useless for far longer than he acknowledges.
Kantrowitz is bound to face criticism that he is changing a game he has struggled to play. He started cutting his price target a bit too late in 2022 (as did most prominent strategists, frankly) and then remained one of the most outspoken bears throughout the monster rally in 2023. As to his rationale for the move, market concentration and correlation are constantly in flux; that’s the nature of the beast, and strategists have to work with the hand that they’re dealt.
But it’s price targets themselves that are the real problem, not the 2022-2024 market. As I’ve documented before, strategist targets imply a false sense of precision and routinely lead investors astray. The average strategist in Bloomberg’s survey often gets the direction of markets right but not very much else (not much of an accomplishment in a market that usually goes up). The average point estimate at the start of the year regularly misses the actual outcome by a wide margin.
What’s more, if you were to closely track changes in the consensus price target and actively trade off that, selling whenever the index rose above the target, and buying when it fell below, history shows that you would reliably underperform a simple buy-and-hold strategy. Bottom-up price targets are also reliably unreliable.
I don’t blame the strategists for failing at an impossible task. I constantly learn from their nuanced work on sectors, styles and market regimes, but I suspect that most of them know the index-target task is bogus. The majority of them coalesce — knowingly or unknowingly — around “safe” estimates that defy the true range of potential outcomes. Kantrowitz has gone out on a limb with his calls, and deserves credit for that. The same goes for Marko Kolanovic, JPMorgan Chase & Co.’s former chief global market strategist and co-head of global research, who has been the victim of cheap shots on social media since he left the firm after a rough couple of years. Kolanovic, an obviously brilliant guy with a Ph.D. in theoretical physics, was known as “Gandalf” until his crystal ball seemingly broke in 2022. But to his credit, he continued to swing for the fences until his exit.
Index targets have been around for decades, and they often generate substantial news coverage when they’re issued or revised. To many, they represent an alluring data point that seemed to answer the question: What’s the bottom line in all this research?
But Piper Sandler’s Kantrowitz isn’t the first prominent voice on Wall Street to abandon them. Tony Dwyer, formerly of Canaccord Genuity LLC, ditched targets for the S&P 500 in 2020, as Bloomberg’s Lu Wang reported at the time.
In a sense, the debate around price targets has parallels with what’s happening in global central banking circles. The Federal Reserve and other central banks issue closely watched projections about the economy and policy rates, but there has been gathering enthusiasm for a proposal by former Fed Chair Ben Bernanke to introduce scenarios instead of simple point estimates. Like the S&P 500 targets, I’d argue that those projections convey false precision, even those coming directly from policymakers atop the most powerful institution in global finance.
Personally, I like the idea of scenarios. They help the public better appreciate the panorama of risks and rewards. But they also present unique challenges and must be done the right way. Like point estimates, scenarios assume a certain amount of human foresight, and, in reality, it’s sometimes the scenarios we can’t imagine that most move markets.
Strategists and economists will face tough choices — and a lot of trial and error — in deciding how many scenarios to present. Too many and you confuse the public; too few and you’re oversimplifying the situation. And what if the public fixates on the most extreme and dramatic outcomes and pays short shrift to more likely ones?
In my view, those are risks worth taking in equity market analysis, because the plain vanilla index target hasn’t served the investing public very well, and Piper Sandler is right to give it the ax. The world is an uncertain place, and we would all be better off — strategists and their readers alike — if we stopped pretending we could predict the future to the exact index point.
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