MORGAN STANLEY: ‘It’s too early to call the top’

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The US stock market is at a record high.

On Monday, the S&P 500 closed at a record 2,129.20 after touching an intraday high of 2,131.78. That’s up 220% from its March 2009 low of 666.

There are plenty of worrywarts out there warning the market has come to far, but Morgan Stanley’s Adam Parker isn’t one of them.

“It’s too early to call the top,” Parker said in a note to clients on Monday. “We think it is very difficult to call the top based on economic data, corporate behaviours, and the credit cycle.”

He elaborates:

“Our signposts include economic factors like consumer obligations, delinquencies, and housing, most of which appear to be improving. Signs of management hubris in the form of capital spending, hiring, inventory, and frothy M&A seem about mid-cycle in aggregate. Capital spending remains relatively constrained, growing at roughly the pace of sales. Inventory doesn’t appear to be an impediment to margin expansion, as backlogs aren’t swollen and book- to-bill ratios appear steady, which typically means management aggression to attract customer orders is tame. Hiring outside of a few areas remains constrained, and our judgment is that wage inflation has been primarily limited to the low end. M&A has been largely immediately accretive as opposed to speculative as in prior cycles. While we see a few signs of excess in management compensation and new corporate headquarters emerging, we certainly don’t think we are late-cycle on these elements. Lastly, corporates have pushed out their financial obligations for several years, making broad near-term credit risk unlikely. We would need to see deterioration in the economic outlook, particularly for the US consumer, increased management hubris, or a burgeoning debt crisis to have increased conviction in a ten per cent or greater US stock market decline.”

So everything from fundamentals like capital spending to anecdotes like shiny new HQs tell Parker this market still has legs.

Parker boiled down three reasons why investors should keep buying:

  • “Firstly, we think the bottom-up earnings estimates are too low.”
  • “Secondly, we think the US economy will improve.”
  • “Thirdly, we think sentiment about US equities is relatively low.”

So, there you have it.

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