The S&P 500 has delivered a lacklustre 1.5% so far this year, leaving some folks wondering if this is just the slow death of the 6-year-old bull market.
“We are viewing this as a mid-expansion period where equity returns are not strong (much like 2015 so far), instead of the end of the expansion,” Morgan Stanley strategists wrote on Sunday. “Should investors regain confidence that the US economy and corporate behaviours will not lead to a substantial earnings correction, we think the market could begin a more meaningful acceleration path.”
Like most of his peers on Wall Street, Morgan Stanley US equity strategist Adam Parker expects 2016 to be another year of low returns. He expects the S&P 500 to climb just 4% to hit his 2016 year-end target of 2,175.
This will be on similarly lacklustre earnings growth.
“While a high percentage of companies were able to show year-over-year margin expansion this year, the combination of muted revenue and negative factors in industrials, energy, and materials, and less benefits from lower oil in terms of consumer spend and lower input costs, have caused us to reduce our 2015 EPS outlook from $124 to $120.5,” the analysts added. “We also lower our 2016 EPS from $128.5 to $125.9 and set 2017 EPS at $131.4.”
All of this is in the context of Morgan Stanley’s 2016 macro house view, which assumes the Fed slowly raises its benchmark rate to from 0.125% to 1.125%, 3.3% global GDP growth, and 1.9% US GDP growth.
Again, this is just one year in the “mid-expansion period.” Parker has long been calling for the bull market to last for years more with the S&P 500 topping out near 3,000 before it ends.
BMO’s Brian Belski and Bank of America Merrill Lynch’s Savita Subramanian are among the pros who believe in this long-term, secular bull market.
It’s worth adding that in this low return environment, Morgan Stanley favours corporate bonds, or credit, over stocks.
“We adjust our allocation recommendations accordingly, lowering our position in equities and deploying more money in credit,” the analysts said. “Such a switch may seem inconsistent with a market where corporate activity is becoming more aggressive, as such periods are usually marked by equity outperformance. But this time we think things will be somewhat different. Relative to prior later-cycle periods, growth looks weaker, central bank policy looks looser, and credit risk premiums are more elevated.”
We’ll see how that call turns out in about a year.