Morgan Stanley chief U.S. equity strategist Adam Parker is out with his stock market call for the year ahead: the S&P 500 is going to 2014 in 2014.
Parker's target is 11.5% above where the index sits today at 1805, and is driven by the bank's forecast for " 6% operating earnings growth, a net 3% share repurchase, and modest further multiple expansion."
"Low dispersion of price-to-forward earnings and higher company-specific risk lead us to conclude that a more concentrated portfolio is prudent for 2014," says Parker. "We are upgrading materials (driven by chemicals) from equal weight to overweight, downgrading industrials from overweight to equal weight, and lowering energy from equal weight to underweight."
In a note to clients, the Morgan Stanley strategist explains the reasoning behind the call:
Since last March, we have been sanguine on U.S. equities. Our logic has been driven more by lack of a bear case than the strength of the base case. We have seen 3 turns (12.0x to 15.1x) of multiple expansion in the last 2 years, only the 4th period with this level of expansion over the last 40+ years. Obviously, a sample size of three isn’t statistically significant, but the prior three periods were all followed by a continuation of the rally for another 12-24 months, as momentum typically persists. The only thing people are worried about is that no one is worried about anything. That isn't a real worry.
In order to time the impossible, the inflection, we remain focused on what could cause fear about a materially lower earnings trajectory, or even what could introduce volatility into the earnings estimates. The answer is – not much right now. We need to see more capital spending, hiring, inventory, and M&A in order to be more fearful of a material earnings decline as these costs get put in place and turn out to be imprudent. We would look for backlog extensions from the technology and industrials companies or increases in book-to-bill ratios as signs demand is improving and spending is imminent. The most pronounced risks remain EM (where CSCO and IBM among others have pointed to recent demand weakness), a policy error (i.e., the Fed can’t distinguish between tapering and tightening and rates materially back up), and Europe (particularly if the dollar strengthens).
With a 2% dividend yield, a 3% percent net buyback, and mid-single digit earnings growth, calling for a big down market is akin to calling for a double-digit market multiple contraction. We don’t think that’s likely. We remain sanguine, and wouldn't be surprised to see the S&P 500 remain robust. Our target of 2014 for 2014 will likely be above consensus. The dream of a steeper yield curve, a belief that the Fed can distinguish between tapering and tightening, and the lack of a credible bear case in earnings could drive further multiple expansion. Upside from economically stronger China and Japan could also help. In fact, it isn't preposterous to say that we could be in an environment of synchronous global economic expansion in 2014, and tapering or not, that isn't fully in today's prices.
Parker's optimistic view on the stock market in the year ahead makes his forecast for the S&P 500 the highest on Wall Street.
The median price target of 15 strategists polled by Bloomberg is 1900.
On September 4, Parker introduced a 12-month-forward price target of 1840. At the time, the index was at 1639, above Parker's previous 2013 target of 1600.
Parker is not the only one who believes the index will rise to 2014 next year. Oppenheimer chief investment strategist picked the same number in his year-ahead outlook, published November 19.
"The 2014 target reflects our expectation that the stock market will have opportunity to move higher over the course of next year, and turn in yet another double-digit increase — albeit around half the size of this year’s rally to date," wrote Stoltzfus in a note to clients. "Our price target is set using the mid-point between our dividend discount model and a price/earnings model. We expect these valuation projections to be supported by improving fundamentals. We continue to believe that U.S. economic growth has in effect been 'primed' by the Federal Reserve’s Quantitative Easing (QE) programs. Recent improvements in the tone of U.S. economic data suggest to us that prospects are good for investors to see a continuation of the economic recovery that could drive earnings higher in the year ahead."
More From Business Insider
- Here's The Most Common Question Investors Are Asking About The Stock Market
- One Key Difference Between Today's All-Time High And The Last Two Market Peaks
- One Of Wall Street's Biggest Bulls Just Published His Bullish 2014 Stock Market Forecast
- Finance Trading
- stock market