Morgan Stanley's Adam Parker is the most bearish strategist on Wall Street with year end target of 1,167 for the S&P 500.
In his latest research note, which was sent to clients this week, Parker pours cold water on the S&P 500's recent breach of the 1,400 level by comparing it to the first time it broke through that level in November 2006.
"Corporate fundamentals are currently strong, but large economic dislocations remain," wrote Parker.
Here's a summary of his points:
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Positives:
- "Higher earnings and cheaper valuations for US equities on trailing and forward earnings, as well as book value and dividend yield."
- "Improved corporate balance sheets – companies have issued more debt, but also have more cash and have lengthened maturities while reducing interest expense."
Negatives:
- "Lower forecast earnings growth and more concentrated earnings among S&P stocks."
- "Non-normalized interest rates and a vastly expanded Fed balance sheet."
- "Much higher commodity prices, particularly oil."
- "Index rebalancing has contributed to performance: 125 new firms have $82 billion more market cap than the outgoing companies had in 2006; also, 25% of income growth is from Apple."
Parker believes all of this is a net negative for investors
"We see the macro headwinds as being sufficiently negative to warrant caution on the part of investors. Risks include softening US economic data, deterioration in Europe, or ineffective policy in China," he wrote. "While this stimulative monetary policy has arguably aided risky assets, it has increased uncertainty as well, since ultimately it needs to be unwound."
"You know our conclusion: Don’t pay a higher multiple for today’s corporate earnings!"
Parker was the one that put that exclamation in bold, not us.
Here's a chart comparing the two years.
