Almost exactly 12 months ago, the market-implied outlook for the S&P 500 indicated that the highest-probability outcome was a total return of 10.5% for the year.
I have updated the market-implied outlooks for the S&P 500 for 2022 and into the start of 2023.
By analyzing the prices of call and put options at a range of strike prices, it is possible to calculate a probabilistic price outlook for the period between now and the expiration date.
The key to the process is to figure out an empirical probabilistic forecast for the price of a stock or ETF, such that options priced using this distribution are as close as possible to the market prices of those options.
The outlook calculated using options that expire on June 17, 2022 provide a 5.07-month forecast, etc.
The market-implied outlook for the next year, calculated using options that expire on January 20, 2023, is consistent with the prototypical form that we expect for broad equity index ETFs.
Theory suggests that the market-implied outlook is expected to be negatively biased because investors, who are risk averse in aggregate, will tend to pay more than fair value for downside protection .
While Wall Street analysts often discuss their predictions in terms of a single price target, it should be obvious that a probabilistic outlook is far more meaningful.
The 15-year annualized total return for SPY is 10.4% per year and the annualized return from 1926 through 2021 is 10.49%.
The market-implied outlooks for the S&P 500 over the next 12 months looks quite favorable, with the maximum probability corresponding to a price return of 9.8%, for expected total return of about 11%.
Disclosure: I/we have a beneficial long position in the shares of SPY either through stock ownership, options, or other derivatives.