Sell-side analysts fail to adequately adjust stock forecasts after Fed meetings
When the U.S. Federal Reserve announces a change in its interest rate, consumers expect shifts in borrowing costs elsewhere and potential price adjustments for things like housing and some consumer goods. New research, however, shows that stock market analysts generally give a collective "meh" around the time of Fed meetings when it comes to forecasting how much stocks will trade for in the…
When the U.S. Federal Reserve adjusts interest rates, investors anticipate changes in borrowing costs and potential price shifts for housing and consumer goods. However, new research from the University of Toronto's Rotman School of Management reveals that stock market analysts often fail to adequately adjust their stock forecasts following Federal Reserve meetings.
Between 2000 and 2020, analysts only revised price targets for 18.5% of companies in the two weeks before and after Fed meetings. As a result, the accuracy of these price targets declined by around 13% during interest rate hikes and over 16% during rate cuts. The study, published in the Journal of Banking & Finance, attributes this inaccuracy to a failure to adjust the discount rate, which analysts use to value future stock prices.
Companies with significant interest rate exposure, such as financial and leveraged firms, experienced even greater forecast errors. Despite having highly rated analysts, those inaccuracies persisted, particularly during rate increases. The findings suggest that analysts may be overly conservative or unable to fully process the impact of interest rate changes.
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