A May 18th report from Morgan Stanley Equity Research argues that both the U.S. economy is really just revving up, and that the seven-year bull run on stocks is not done yet. MS analyst Adam Parker and colleagues say that U.S. stock markets have more room to run because earnings estimates are too low, economic growth is likely to continue and investor sentiment is reasonably constructive. But the most talked about part of the report, was where Jonas attacked a financial advisor who questioned the analyst’s bullishness.
MS analysts Adam Parker et al. slam a critic
Adam Parker et al. take a swipe at a critic in the introduction to their report.
“Recently, a financial advisor emailed us that our bullish outlook was almost by definition a market top. We were worried that there may be some truth to this person’s claim; after all, it is exactly our nightmare scenario, and Wall Street’s history isn’t exactly devoid of strategists at bulge bracket firms providing such examples. However, we analyzed this particular advisor’s background and learned that they have been at this for 27 years and have practically no assets under management. A vocal dissenter never felt better. It remains to be seen if we have a bad market call, but it is clear that this particular advisor is bad at their job.”
Putting that funny intro aside, Adam Parker had more to say.
Adam Parker bull case for U.S. stocks starts with earnings and economic growth
The MS analysts lay out a three-pronged bull case for U.S. stocks. First, they argue that bottom-up earnings estimates are too low. Consensus S&P 500 earnings project $119 in EPS for 2015, and Morgan Stanley is calling for $124. Although it is rare for bottom-up numbers to be overly pessimistic (only happened six times in the 39-year history of forward earnings estimates), Parker and colleagues say we have already seen the bottom, especially given the upward revisions in six of ten sectors and a overly negative earnings revisions earlier this year.
They say look for earnings in the consumer, healthcare, financials and energy sectors to beat consensus Wall Street estimates.
Second, the MS team believes the U.S. economy will continue to improve. While the U.S. and global economies have been weaker than earlier forecasts, continued economic growth through the second half of 2015 seems highly probable. They argue that an increasingly confident consumer will help keep the American economy moving forward over the next few quarters.
Third, Parker and team say that sentiment about U.S. equities is “relatively low.”
Adam Parker – Few signs that market is topping
Finally, it’s just too early to call the top based on economic data, corporate behaviors and the credit cycle. The analysts point to economic factors like consumer obligations, delinquencies and housing, most of which appear to be improving. Moreover, signs of management hubris in the form of capital spending, hiring, inventory and frothy M&A seem more like mid-cycle rather than late cycle. In particular, M&A has been immediately accretive for the most part, instead of speculative as was often the case in prior cycles. There may be a few signs of excess in growing management compensation and some new corporate headquarters, but these are exceptions rather than the rule.