Adam Parker, Morgan Stanley’s chief U.S. equity strategist, is sounding bullish in his latest note to clients.
“Looking 12 months forward, we are introducing a base case S&P500 price target of 1840, implying roughly 12% upside from here,” he wrote. “Why? For one thing, markets can work while estimates are being downwardly revised.”
This is very interesting coming from Parker who has been one of the more cautious strategists on Wall Street due to falling earnings expectations.
Indeed, Parker and his clients have been getting steamrolled by the expansion in the stock market’s price-to-earnings multiple (i.e. when stocks rise and earnings expectations fall).
“We have argued in the past that it is extremely difficult to forecast the market multiple,” wrote Parker in his new note. “Even knowing major economic results a year before everyone else would barely aid in this regard. As such, we are left to guess at what might cause changes to the market multiple.”
Perhaps the most interesting chart in his report is this one showing that on average (from 1976 to 2012) earnings expectations only fall as a year progresses. And we all know that stocks are way up since 1976.
His new 12-month S&P 500 target assumes a 15.6 PE multiple on $US118 of earnings, which is the midpoint of his 2014 and 2015 EPS forecasts.
Parker’s forecast isn’t based on just random multiple expansion. The fundamentals also look good for stocks:
Hubris and debt: These two cause every crisis or bubble to burst. Today CEO confidence is only average, while the market is near record highs. Capital spending is low, M&A isn’t exactly frenzied, hiring is low, and inventory builds in advance of recovery are weak. The date when debt is due is more important than how much there is, and very few companies are likely to go bankrupt in the next 2.5 years. By this measure, we’re not at the top of the cycle. Balance sheets are in great shape, cash balances are at record levels, and financial obligations have been pushed out. We are buyers of dips and maintain our constructive stance, even though markets appreciated more than we expected year-to-date.