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Sound Advice: November 19, 2025

How reliable are target prices for stocks?

Target prices for stocks, as issued by financial analysts, generally show very limited reliability and should not be seen as precise predictions for future stock prices.  Studies reveal that roughly 30-54% of target prices are met or surpassed within the forecast period—with errors and bias common among these forecasts. Analysts can provide valuable information on prospective future earnings, but target prices tend to be based on valuation levels (price-earnings multiples) that are almost always much higher or lower than what might be considered normal levels. 

Valuation levels are a function of several factors including prospective growth rates and consistency of past growth.  The higher the prospective growth rate, the higher the valuation. But there are several caveats.  One is that valuations will be reduced if the past had significant ups and downs from year to year.  The other is that consistency of past growth may increase confidence in what’s likely to be ahead, but that alone will not increase valuations.

In the majority of time, individual stock valuations as well as market valuations are not at normal levels, yet those who are projecting target prices make their projections based on normal valuation levels.  That’s a fatal flaw.

What Do Target Prices Indicate?

Target prices reflect an analyst’s expectation for a stock’s future value, integrating company performance, sector trends, and valuation models. Although they may serve as interesting starting points, they are inherently based on forecasts and assumptions that may not hold true due to market or company-specific volatility.

Factors Affecting Reliability

  • Experienced analysts and larger brokerages tend to produce more accurate forecasts, especially when focused on specific industries or companies.​ But that relates to earnings growth rates, not future prices.
  • Accuracy diminishes over time—information in price targets tends to become outdated well before the typical one-year horizon, so more frequent updates are needed for relevance.

Limitations and Common Misconceptions

  • Many target prices overestimate future returns.​
  • Market reaction to target price changes may occur in the short term, but this response does not guarantee the stock will reach its target over the longer run.​
  • Relying solely on target prices is risky; they should be ignored when making investment decisions.

Practical Advice for Investors: Pay no attention!


N. Russell Wayne

203-895-8877

nrwayne@soundasset.com

www.soundasset.blogspot.com

 

 

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