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Morgan Stanley bull comes out, predicts the S&P heads to 3,000

“We think the US stock market is going higher,” Morgan Stanley’s Adam Parker said on Tuesday.

This is a jarring call, especially as we enter the fall season, which is historically associated with volatility. This year in particular, fall comes with a series of major risk events that do not appear to be priced in the financial markets. Indeed, this week’s Barron’s cover story is titled: “Strategists Say Beware the Bear.”

To be clear, Parker’s call consists of 12-month price targets that go well beyond this year’s fall.

“We are raising our 12-month price targets for the S&P 500 – base case from 2200 to 2300, bear case from 1600 to 1800, and our bull case from 2400 to 2500,” Parker said.

The US stock market continues to defy the odds, with the S&P 500 (^GSPC) rallying for seven and a half years in what has been one of the most impressive bull markets in history. At 2,179, The S&P is up 227% from its March 2009 low.

One important metric that has market skeptics on guard is the price/earnings (P/E) multiple, which is stretched well above its long-term averages. For some experts, this leaves the stock market vulnerable to a sharp correction.

The market is more expensive than usual. (Image: Morgan Stanley)

But Parker has long been a vocal critic of folks who think of P/E multiples in this “hubristic” way. Specifically, he believes it’s almost a waste of time to predict where the P/E multiple will head in the near term. Indeed, he actually raised his P/E forecast to 17.7x (from 17x), which is far above the 13.8x average.

“While we have argued many times that we think forecasting the market-level price-to-earnings ratio is difficult, our best guess is that growth and interest rates ultimately matter in the long term,” Parker said.

Here are Parker’s four arguments for being bullish (verbatim):

1) “Bond yields are so low and seem risky – the old “relative to other asset classes” argument.

2) “70% of the global equities that trade $100 million or more each day are in the US – the old liquidity argument.

3) “The US is the only major region with potentially positive EPS growth as a base case – the old fundamental argument.

4) “Investors aren’t positioned for big upside- whether you look at futures, options, prime brokerage data, surveys, or anecdotally from meetings, we don’t see excessive optimism among the client base – i.e., the old positioning argument.”

In addition to upgrading his 12-month price target, Parker also reiterated his forecast that the S&P 500 heads to 3,000 by 2020.

“We still believe this to be true, as most US consumer metrics appear directionally positive (housing, jobs, delinquencies, obligations, confidence, personal spending, etc.); corporate excess seems under control; and low growth is still the base case economic forecast,” Parker said.

“With few other attractive investment alternatives, we see the US equity market as the beneficiary of further appreciation.”

Sam Ro is managing editor at Yahoo Finance.
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