Toronto - When the U.S. Federal Reserve announces a change in its interest rate, consumers expect shifts in borrowing costs elsewhere and potential price adjustments for things like housing and some consumer goods.
New research however shows that stock market analysts generally give a collective "meh" around the time of Fed meetings when it comes to forecasting how much stocks will trade for in the future, called a price target. Despite dozens of Fed meetings between 2000 and 2020 where interest rates were either raised or lowered, researchers at the University of Toronto's Rotman School of Management found that price targets among analysts working at investment houses and brokerages were only adjusted for 18.5 percent of companies in the two weeks before and after Fed meetings.
As a result, those targets -- which investors use when deciding to buy or sell stocks -- lose accuracy after a Fed meeting, either overpredicting future stock prices when rates rise or underpredicting them when rates drop. In practice, stock prices on average fall in response to interest rate hikes and rise when rates relax. Comparing actual stock prices to what was forecast, the researchers found that prediction inaccuracy increased by about 13 percent when the Fed hiked rates and by more than 16 percent when rates dropped.
That analysts are making such mistakes is "not surprising," said lead author Junhao Liu, a senior accounting lecturer, which is equivalent to an assistant professor, at the University of Melbourne who conducted the research while completing his PhD in the Rotman School's accounting doctoral program. "Analysts always make mistakes, whether intentional or unintentional."
The driver of this particular error, show Dr. Liu and his co-researchers, is a failure to adjust the discount rate analysts use as part of their forecasting. Expressed as a percentage, the discount rate accounts for things like risk, interest rates and the cost of tying up money over the longer term and translates a stock's future value into today's money.
Not surprisingly, forecast inaccuracy was heightened for companies with high exposure to interest rates, such as financial and highly leveraged companies. It was less pronounced for investment houses with macro-economists on staff who presumably could provide more precise guidance on potential impacts of interest rate changes.
Even having highly rated crackerjack analysts did not help after a Fed rate increase, which happened 29 times during the studied period. Those hot performers did however show less inaccuracy around rate decreases, which happened 28 times.
The findings highlight "potential limitations in how some of the most important capital market intermediaries interpret and act upon fundamental macroeconomic information," said Ole-Kristian Hope, who is the Deloitte Professor of Accounting at the Rotman School who supervised Dr. Liu's research. The study was also co-authored by Rotman accounting PhD graduate Mingyue Zhang, now an assistant professor in financial reporting at the University of Waterloo.
While the research did not delve into why analysts fall short in adjusting their target prices, Dr. Liu speculated that it may be because they are just being conservative -- not wanting to make changes because these will have consequences elsewhere -- may be unable to process the exact effect of the interest rate change, or they may feel incentivized to maintain high price forecasts in the face of an interest rate hike.
Given the wild rise in interest rates following the COVID-19 pandemic, the findings could be helpful to investors trying to make sense of the market and to analysts striving for better accuracy in an era of dramatic monetary policy shifts, the research concludes.
The study appeared in the September 2026 issue of the Journal of Banking & Finance.
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