How high can the S&P 500 go?
"Our best guess is that an S&P 500 peak of near 3000 is possible should the U.S. expansion prove to have five or more years left to it,” according to Morgan Stanley’s Chief Equity Strategist Adam Parker and economist Ellen Zentner in a recent report.
Of course, getting that expansion to last is no simple feat, Parker explained early Tuesday on CNBC.
“Our phrase for this … is hubris and debt,” Parker said. “If you don’t see a lot of hubris and you don’t see a lot of debt, it’s hard to call that top of the cycle.”
He and other Morgan Stanley (MS) analysts are tracking capital spending, hiring, debt, interest cover and inventory – which look good.
“Look at the evidence,” explained Parker. It points to “a pretty prolonged expansion. If you get mid-single-digit earnings growth every year for the next several years, we can get a lot higher on the S&P. It could be the longest expansion ever.”
The analyst admits that a continued expansion and market bull run depend on many conditions going well, of course, and a slowdown in China or Europe not coming to fruition.
“The world is a risky place,” Parker admitted.
However, “Look at how uncorrelated the GDPs are around the world are today. And look at the debt stack and interest coverage on it."
For the S&P to hit 3,000 and the expansion to continue for another five years, the experts say 6%-per-annum earnings growth must continue and the price-to-earnings ratio of 17 times needs to remain steady.
This is what concerns Wharton finance professor Jeremy Siegel.
The finance guru said early Tuesday on CNBC, “We are creeping closer to fair market value [for stocks], which I think is approximately 18 times S&P earnings," he explained.
Still, he remains bullish and sees the Dow Jones Industrial Average hitting 18,000 by year-end.
"Our economy is the best of the three major engines in the world, and that's why I have faith in U.S. stocks," Siegel said during the TV interview.
The overall economic view highlighted by Parker and Zentner in their report, "2020 Vision: Long Live the Expansion," is that the U.S. economy is in “a prolonged period of deleveraging … coupled with an uneven global recovery.
The implication of this mixed-growth story, they say, is that the U.S. economy “is actually only in the early parts of its growth cycle. It is also uniquely positioned in the world, benefiting from low volatility, healthier balance sheets and a lack of corporate exuberance.”
The Morgan Stanley experts summarized their argument as follows:
- The world economy is not in sync. Major regional economies are at different points along the growth cycle. In general, DM is leading while EM is lagging.
- Volatility in the U.S. continues to trend lower, which can extend the life of expansions.
- Deleveraging in the U.S. is ongoing, albeit largely complete, and balance sheet priorities have shifted.
- Interest payments on debt burdens are ultra-low, and household debt dynamics suggest there exists a sizable cushion protecting consumers in a rising interest rate environment.
- Capital spending and inventories do not look stretched.
- Corporate management hubris and other corporate metrics of overheating remain muted.
- Several broad economic indicators in the U.S. have only just reached “normal” expansionary levels and are far from looking unsustainable.
“We think the market is going higher,” said Ari Wald, Oppenheimer’s head of technical analysis, in an interview on MSNBC lst week. “We were buyers in early August, and we are still buyers.”
In May, Jeremy Grantham, co-founder and chief investment strategist of Grantham, Mayo, Van Otterloo & Co., outlined his view that the market most likely won’t see a major turn until after the S&P 500 hits a high of 2,250, but then the bulls could take over and pound investors — mostly like in late 2016.
It's Grantham's belief that the stock market bubble is still inflating.
Check out Jeremy Grantham: Market Crash ‘Not Imminent’; Bubble Still Inflating on ThinkAdvisor.