How Good is Your Forecast?

As another outlook season begins, it’s worth asking: how much confidence should we place in annual forecasts?

Cast your mind back to late 2024. How many “2025 Outlook” reports predicted a tariff-driven recession, aggressive rate cuts, and the decline of U.S. dollar dominance? Fast forward to today: growth slowed but avoided collapse, rates stayed higher for longer, and the dollar strengthened in the second half of the year.

The gap between expectation and reality raises an important question: are forecasts useful guidance or just comforting narratives?

Reality Check: 2025 Forecasts vs 2025 Experienced
Early warnings of global recession and U.S. stagflation proved overstated. Tariffs hurt trade, but new deals and corporate adaptability kept growth positive. Similarly, markets anticipated rapid central bank easing; instead, major banks largely held rates steady, signalling fewer cuts than hoped.

And the dollar? After early weakness, it rebounded strongly, driven by resilient U.S. growth and slower-than-expected Fed action.

These examples highlight a recurring truth: markets rarely follow the script.

USD Performance Relative to Major Currencies (Positive = USD Stronger)
June 2025 to December 2025

Source: Morningstar. Past Performance is not a reliable indicator of future performance

Why Is Forecasting So Difficult?
Forecasts rely on information available at a single point in time. Yet markets are dynamic, shaped by sentiment, policy shifts, and unexpected events.

Consider European equities: consensus predicted weak growth, fading consumer momentum and political fragmentation. Yet, Europe rallied strongly in Q1 as new information emerged around supportive fiscal policy, ECB rate cuts, and stabilising economic growth. Instead, Q1 delivered a rally on fiscal support and ECB cuts, developments unknown when those forecasts were written.

So, the question becomes: if forecasts are so fragile, why do we rely on them?

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