Do analysts predict market returns?

Sell-side analysts working for investment banks routinely issue forward-looking price targets for the stocks they cover, which can be summed and weighed for broad market indices. The difference between the contemporary index level and these price targets can be considered the implied expected price return. We have asked ourselves whether the return outlook given by analysts on aggregate (consensus estimate) does indeed provide information about future market performance. The answer is simple and disappointing but yields some intriguing insights into the sell-side analyst’s reaction function.