Stock Market Forecasting

Below is a definition of forecasting and information on stock market forecasting as well as other financial economist forecasting.

What is forecasting for the stock market?

Forecasting can be defined as developing a point of view on how a company will perform on the key value drivers:

• growth and
• return on investing capital.

Basic of stock market forecasting methods

Step 1 in Stock Market Forecasting

Evaluate company's strategic position to estimate the company's:

• growth potential
• ability to earn returns above its cost of capital

In order to make a forecast, you need to consider industry characteristics as well as competitive advantages and disadvantages. In order to earn returns on capital above the opportunity cost of capital, the company needs to develop and exploit a competitive advantage because otherwise the competition would force all companies to earn their cost of capital or less.

Step 2 in Stock Market Forecasting

Develop performance scenarios for company and industry and describe how performance will evolve as well as critical events that may occur and their impacts.

Step 3 in Stock Market Forecasting

Forecast each profit and loss item as well as balance sheet item based on the scenarios. Aggregate each line to forecast free cash flow (FCF), ROIC (return on invested capital) and other key value drivers.

Step 4 in Stock Market Forecasting

Check overall reasonableness especially of key value drivers.