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Morgan Stanley Expects S&P 500 Valuation to Decline on Economy: Tom Keene

The price investors are willing to pay in relation to earnings for the Standard & Poor’s 500 Index companies will decline as economic growth decelerates, according to Morgan Stanley (MS)’s Adam Parker.

“Our contrarian call at Morgan Stanley is that the market multiple is going to contract,” said Parker, chief U.S. equity strategist at the New York-based bank, in an interview today on “Surveillance Midday” with Tom Keene on Bloomberg Television. “That’s a function of the belief that growth’s decelerating. It’s probably going to be more volatile, and then you have the overhang of inflation.”

An increase in capital spending in the U.S. will reduce the free cash flow of companies and damp a rise in equities, according to Parker, who predicted the combined earnings of companies in the benchmark gauge for U.S. stocks to be $93 this year, compared with the average estimate of $94.34.

Investors should favor technology stocks over the industrial sector as corporate earnings sag as stimulus measures in the U.S. end, Parker said. His forecast for the S&P 500 at the end of 2011 is 1,238, the lowest of 13 strategists surveyed by Bloomberg. S&P 500 stocks trade at an average price-to- earnings ratio of about 15.

The S&P 500 Index (SPX) advanced 0.4 percent to 1,279.21 at 4 p.m. in New York, rallying for a second day as the Federal Reserve cleared the way for big banks to boost dividends, Libya announced a cease-fire, and central banks worked to support Japan’s economy after the March 11 earthquake.

“You don’t want to own the stock market until the capital spending is done accelerating,” Parker said. Technology stocks “have never been cheaper versus industrials; they have the specter of returning more cash to the shareholder,” he said.

To contact the reporters on this story: Thomas R Keene in New York at tkeene@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Robert Burgess at bburgess@bloomberg.net

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