Analysts rarely adjust price targets around Fed meetings, study finds

The University of Toronto said Rotman School researchers found analysts adjusted price targets for only 18.5% of companies in the two weeks around meetings of the Federal Reserve, known as the Fed, America’s central bank, from 2000 to 2020. A price target is an analyst’s expected stock price, and investors use it to decide whether to buy or sell, so errors after Fed decisions matter.

Those forecasts also grew less accurate: inaccuracy rose by about 13% when the Fed raised rates and by more than 16% when rates fell. The researchers say the driver is a failure to adjust the discount rate, which converts a stock’s future value into today’s money and reflects risk, interest rates and the cost of tying up money.

But the error was less pronounced at investment houses with macroeconomists on staff. The study did not examine why analysts fall short in adjusting their targets. Still, the authors say the findings could help investors after the sharp rise in interest rates following the COVID-19 pandemic.

Sources: University of Toronto