Beware unpleasant surprise in forecasting 2015 The finance industry is already starting to turn its attention to next year, with the first 2015 outlooks trickling out. It is worth considering the big mistake most forecasters made this year, though: they failed to anticipate the sharp drop in bond yields (and so rise in bond prices). What has happened in markets this year should be put in the context of falling expectations for long-run growth. Lower potential growth means interest rates do not rise as high, once they eventually start rising. At the start of the year pretty much everyone was focused on when rates would start to rise, not on how far. "When" matters to short-dated assets, such as 2-year bonds and cash. But "how far" matters to long-dated assets such as shares, which will suffer higher rates for many years. The US Federal Reserve handily publishes policy makers" forecasts, and the median long-run rate prediction is down from 4 per cent last December to 3.75 per cent. The drop may not sound like much, but on a standard dividend discount model it justifies a price rise for shares of about 13 per cent. Coincidentally, the S&P 500 is up 13 per cent this year, including dividends. Boston-based GMO calculates that a cut in the expected cash rate of 1.25 percentage points should boost shares 44 per cent, and help go-go growth stocks far more than the cheap value shares it usually prefers. There are reasons to doubt the theory. This year US growth and value stocks are exactly in line, after big swings. The most extreme growth story, biotechnology - often companies with no revenue, let along profit - is well ahead. But this may be unrelated; internet stocks are seen as the other big source of long-run growth, and are flat this year. Worse still, long-dated bonds have beaten stocks, while lower long-run rates should benefit shares more. Markets have a lot more going on than just lower long-run rates, of course. But even if lower peak rates and lower bond yields were the full story, it would be disingenuous for Wall Street to use it as an excuse for bullishness. Rates are lower because growth is expected to be lower, which means profits should rise by less in future. Shareholders who factor in lower rates but stick to profit predictions will eventually receive an unpleasant surprise.