Survey-based Stock Market Return Forecasts

Can surveys of various expert and inexpert groups usefully predict stock market returns? In their March 2023 paper entitled “How Accurate Are Survey Forecasts on the Market?”, Songrun He, Jiaen Li and Guofu Zhou assess abilities of the following three surveys to predict S&P 500 Index returns:

• The Livingston (LIV) survey of professional forecasters from industry and academia, conducted each June and December.
• The Chief Financial Officer (CFO) survey directed quarterly to about 4,500 U.S. firms.
• A combination (NX) survey that combines inputs from sources such as the UBS/Gallup survey, the Conference Board survey and the Michigan Survey of Consumers to represent the typical U.S. household.

For comparison, they also look at two other predictors, one based on a set of economic variables and the other based on aggregate short interest for U.S. stocks. Their benchmark forecast is a simple random walk tethered to the historical mean return. They test forecast accuracies statistically and gauge the economic value of each forecast based on out-of-sample certainty equivalence gain and Sharpe ratio for a portfolio that times the S&P 500 Index based on the forecast (versus buying and holding the index). Using data for the selected surveys, the set of economic variables, aggregate short interest for U.S. stocks and the S&P 500 Index as available (various start dates) through December 2020, they find that: (more…)