What Are Price Targets and How Do The Geniuses of Wall Street Come Up With Them?
Along with the start of the new year comes a myriad of analyst price targets that try to forecast the fate of everything from stocks to oil to gold.
But projecting where the markets are headed is a tough business and one that is fraught with errors. Perhaps that’s why Benjamin Graham once said, “I am skeptical about stock market forecasting by anybody, and particularly by bankers.”
Price targets reflect strategists’ expectations of the price at which a security is supposed to trade at in the future. Typically, the time frame is 6-12 months.
There are many ways to derive a price-target number, and analysts often have preferences toward specific methods. That, combined with the fact that analysts are often wrong (consider just how many strategists incorrectly predicted a bear market in 2023), tends to give the predictions business a bad rep.
Yet, Wall Street hasn’t given up because there are some merits to putting serious thought into price targets. Together with sector-weighting recommendations, they help drive decisions about whether to hold, sell, or buy a security.
For example, let’s say analyst XYZ has a year-end $100 price target on crude oil, when a barrel is currently trading at $35. Obviously, that means XYZ is bullish on oil prices, but taking a closer look at the reasons why XYZ came up with that price target may be much more revealing than the actual price target itself. It could be that XYZ expects that an outbreak of war could drag down supply or that XYZ expects a jump in demand from China. Either (or both) of those scenarios would translate to higher oil prices; the reasons why XYZ is overweight on oil can be as informative as the actual target.
To correctly estimate where a security is headed requires some brain and a whole lot of luck. In the next section, we’ll look at one popular way in which you too can come up with these price targets – even if you don’t have an advanced math degree. (For the purposes of this article, we will only discuss stock price targets.)
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