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Adam Parker, Morgan Stanley’s top U.S. equity strategist, has been on the more bearish end of Wall Street when it comes to forecasting what stocks will do.
In November, he issued a 1,434 year-end target for the S&P 500.
But with the S&P 500 surging to 1,560, just 5 points from its all-time high, Parker has finally felt compelled to revise that number.
In a research note published on Sunday, he raised his target to 1,600.
“Much of the market’s recent gains have come from multiple expansion rather than higher earnings expectations,” he wrote. “In this update we are modestly raising our S&P 500 2013 EPS forecast from $99 to $103, marking to market the higher-than-expected 2012 year-end results.”
More on why multiples have expanded:
Why has the P/E expanded? Most likely, this reflects central banks’ aggressive liquidity injections, which have translated into an increasing conviction among investors that major tail risks have been indefinitely removed. The growing reality that there are limited investment opportunities outside of equities has fuelled stronger inflows into equity markets in some regions and driven expectations of an even more substantial rotation. While these factors may drive a further moderate increase in valuations, our guess is that the majority of the re-rating is now behind us, absent a more material improvement in the economic landscape than we currently forecast. Our assumptions for the price-to-earnings ratios of most markets are unchanged or lower (in the case of Japan) except for the US, where we are increasing the projected multiples in our base, bull, and bear cases by approximately 1.5 turn…
Parker was 2011’s most accurate market forecaster. However, he was way off in 2012 when he said the S&P 500 would end the year at 1,167. (It actually went to 1,426).
Back then he blamed his inaccuracy on getting the market multiple wrong.
“Only the hubristic deign to project the market multiple — and those who “accidentally” get it right for a year, like us in 2011, and potentially develop exaggerated confidence — as evidently we did this year in projecting another year of multiple contraction,” wrote Parker last year when he realised his 2012 call was likely doomed.
Once again, it looks like his multiple assumption was far too bearish.