Stocks in the U.S. are once again around record highs. Although there are well-known risks in the market, from geopolitics to disappointing U.S. economic data to stretched valuations, Morgan Stanley equity strategist Adam Parker remains bullish.
In a note out this morning titled We Are Full of Bull, he gives three reasons why:
Firstly, we expect a 2014 economic replay. We think the economy in the US will accelerate in the 2nd and 3rd quarters as a number of temporary and tactical issues that impacted Q1 abate. Secondly, we think the bottom-up consensus earnings expectations are too low. This has happened only 6 times in the last 39 years, and never before mid-cycle. While the sample size isn’t statistically significant, the multiple typically has expanded when the bottom-up numbers have risen. Our top-down forecast is $124 in 2015 EPS for the S&P500, vs. the bottom-up expectations of $119. Thirdly, we don’t see sentiment on US equities as ebullient and we like the fact that net hedge fund exposures in the US appear to be exactly in line with 5-year averages, and sentiment about other equity regions is clearly more positive than for the US. That’s a good setup for meaningful appreciation.
And on valuations, Parker writes:
Moreover, it is hard to argue that the US equity market is in a bubble when the valuations of government bond yields, select corporate bond yields and other asset classes (Hong Kong, London, New York, Silicon Valley, and South Beach homes, to name a few) are clearly more stretched. Not to mention the valuation of men’s ties and women’s purses, which have inflated at 20% per annum for a decade.