The Accuracy of Investment Banks’ Predictions


As you may have noticed by checking out the Free Market Insights homepage, analysts at investment banks set target prices often, in fact, daily. Daily, we see new buy/sell/hold recommendations and target prices being set. Analysts leverage macro economic data, stock fundamentals, industry trends, and technical indicators to make their predictions. The question is, how often are their predictions accurate? And who can you trust?

Here at FMI, we have the data that those analysts don't want us to analyze. So lets begin.

In our most recent data pull on 2019-03-23, we surveyed 500 different analyst target prices from before 06-01-2018. Of those predictions, 75.57% where bullish and 24.43% where bearish.


Of those predictions, 50.31% predicted the future stock price direction correctly. On average the actual stock return was -2.88% while the average expected return was 0.11%.


However, looking at the predictions themselves, on average, the analysts missed their predictions by -13.61%.


These results may be staggering. However, there are many factors that could explain these results such as macro-economic trends, analyst bias, analyst confidence, and others. We continue to run this analysis from time to time to see if the results change under different environmental conditions. However, regardless of the average results, this data still begs the question: which analyst(s) did the best?


Before we answer that, some context.


In the news we see two distinct types of predictions. Consensus Targets and Investment Bank Targets. Consensus targets are the average target price of all of the available investment banks' target prices. We also look at the individual investment bank targets separately to see who really has predictive power.


Usually, consensus target prices have performed rather poorly. Overly aggressive analyst(s) shift the mean up and the stock under performs the average. However, the more conservative banks often do quite well, and when a conservative bank is confident in a stock, it often outperforms the market.


Thus we have two main takeaways:

1) Don't always trust Consensus Targets as averages can be skewed

2) Invest in the stocks recommended by conservative Investment Banks

doing so will limit your risk and maximize your return.



To see which investment banks predicted stock movements the most accurately, you can view the data here.



Good Luck, and enjoy using Free Market Insights.


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