Why Annual Market Forecasts Often Miss the Mark—And the One Method That Actually Makes Sense

By Joseph Zappia, Co-Chief Investment Officer

I love this time of year.

Every bank, brokerage firm, asset manager, and advisor is asked the same question: “What is your forecast for next year?”

I guess asking the question is human nature. We all tend to reset our brains each year—be it healthy eating, working out more, or promising better financial discipline. We crave a roadmap.

But that doesn’t change the silliness, or downright stupidity, of relying on supposed “people in the know” acting like they can predict the unknowable.

Don’t get me wrong. The banks and brokers and their strategists apply all kinds of seemingly sturdy methods to get to their targets. But at the end of the day, it’s all just a guess.

Consider the latest note from DataTrek. They lay out the “base rates”—90-year historical returns with standard deviations around them—as a starting point. What you realize quickly is that stocks return an average of around 11% annually.

So, any Wall Street forecast falling between 8% and 14% is simply using the statistical average, not offering some profound, unique insight into the world.

However, if we are going to play the prediction game, this “Base Rate” method, inspired by Nobel laureate Daniel Kahneman, is a more transparent way of framing expectations.

An Evidence-Based Framework for Market Expectations

Most forecasters start with a narrative—”AI will change the world” or “A recession is coming”—and find numbers to fit it. I prefer the Kahneman approach because it does the opposite. You start with the empirical history (the Base Rate) and only adjust if you have overwhelming evidence to do so.

Here is the 90-year cheat sheet (1928–2024) that serves as our mental anchor:

• S&P 500: +11.8% average return
• Small Caps: +17.5% average return (but with massive volatility)
• Gold: +10.8% average return (since 1971)
• 10-Year Treasuries: +4.8% average return

If you stopped reading right here and just guessed “12% for the S&P 500,” you’d historically be closer to the pin than most highly paid strategists.

My Read on 2026

When I look at the data for 2026, I see a clear signal to tilt bullish on Large Caps and Gold, but I remain cautious on Small Caps.

• S&P 500 (Prediction: +12-15%): I am adjusting above the base rate here. Why? Corporate margins are hitting records, and analysts are actually revising earnings up for 2025/2026—an anomaly that usually signals momentum.
• Gold (Prediction: +13-15%): I’m also adjusting this above the base rate. Structural central bank buying has created a new floor for the metal, disconnecting it from its usual volatility.
• Small Caps (Prediction: Below Base Rate): Small caps usually rip higher coming out of a recession. Since the economy is stable, they lack the catalyst to beat their historical 17% average.

The Elephant in the Room: Valuations

Now, I know what you’re thinking. “Stocks look expensive.”

You are right. The Shiller Cyclically Adjusted Price-to-Earnings (CAPE) ratio, which looks at earnings over a 10-year cycle, is hovering near 40x. That is nosebleed territory, approaching the Dot-Com peak.

But here is the nuance that separates the traders from the investors:

• Short Term: The CAPE ratio has zero correlation with returns over 1 year. Expensive markets can get more expensive (see: 1999). That is why my 2026 forecast remains bullish.
• Long Term: The CAPE ratio is highly correlated with 10-year returns. A ratio of 40x implies that for the next decade, annualized returns might be as low as 0% to 3%.

We are essentially borrowing returns from the future to pay for the party today.

One Big Blind Spot

One final note on this data: It is entirely US-centric. The historical dataset from NYU excludes International Stocks because the clean data doesn’t go back to 1928.

This matters because while US stocks are trading at 22x earnings, International and Emerging Markets are trading closer to 12x-14x. If you are worried about that “lost decade” prediction for the S&P 500, looking abroad might be your best hedge.

So, don’t read forecasts to find out what will happen. Read them to understand the process the analyst is using. If they aren’t starting with history, they’re just guessing. For 2026, the history says: Stick with the winners (Large Cap & Gold), but keep one eye on the exit.

Sources: Aswath Damodaran Annual Return data: NYU Stern; DataTrek Daily Briefing December 5, 2025

Disclosure: This material is for informational and illustrative purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Opinions expressed herein are based on economic and market conditions at the time this material was written, and do not necessarily reflect the views of LVW Advisors.  Economies and markets fluctuate.  Actual economic or market events may turn out differently than anticipated. Facts and data presented have been obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by LVW Advisors as to its accuracy, completeness or correctness. Additionally, LVW Advisors does not make any warranties with regard to the results obtained from its use and has no obligations to update any such information.

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