Admittedly, there are many parts of investing that don’t always make a lot of sense. One of those things is a subject of this week’s client question – price targets.

A client brought this question up after reading an article earlier this week that noted JP Morgan was the latest financial firm to raise their year-end S&P 500 price target to 8,000.

What exactly is a price target? A price target is a financial analyst of institution’s prediction of where a certain stock or index (in this case, the S&P 500) will be at a certain future date. In many cases, price targets are set for calendar-year ends or a future 12 month periods.

These price targets usually have some rationale behind them – often an estimate of actual earnings multiplied by a valuation multiple (like price to earnings). Targets can be changed mid-year and are usually adjusted when the original target becomes rather meaningless (by being exceeded on the upside or way out of reach on the downside).

Why are price targets issued in the first place? This is a question I often ask myself! At a high level, they are meant to signal to clients and the “street” how a given firm feels about the market for a year. If the price target is above the starting point of an index, that signals that it’s anticipated that markets will go up during the year. On the flip side, a price target below current market prices signals challenging times ahead. There is also likely an element of marketing/publicity involved as research firms that issue an outlying prediction (on upside or downside) which prove correct often receive considerable media “buzz.”

The problem I – and many others – have with price targets is how quickly they are abandoned or revised. As noted above, they are often adjusted mid year based on actual performance of markets. While I certainly understand that things can change during a year and that unforeseen events can arise that materially change the playing field, it seems to defeat the purpose of the target-setting process if it is frequently adjusted. Reminds me of setting a budget and revising it based on actual spending midstream!

Regardless of my opinion on price targets, they remain a key exercise for wall street participants. Most estimates as of now have the S&P 500 reaching 8,000 by year-end. That would certainly be a great end to the year. We’ll see if the targets are realized.