Tags: Morgan Stanley | Goldman Sachs | stock | bond

Morgan Stanley Stock-Valuation Call at Odds With Goldman Sachs

Monday, 01 Dec 2014 11:43 AM

Forecasts for stock-market performance tend to pile up faster than snow in Buffalo at this time of year, and among the blizzard it’s notable that two of the highest-profile prognosticators disagree on one fundamental issue: valuations.

The price-to-earnings ratio of the Standard & Poor’s 500 Index has steadily increased for more than three years. It’s risen 54 percent since October 2011 to 18.3 times reported earnings, according to data compiled by Bloomberg, and 58 percent to 16.1 when looking at estimated earnings for the following 12 months.

Rising valuations can be a sign of several things. Some investors may have grown more comfortable with the outlook for the economy and profit growth and are confident stocks are a good buy even if they aren’t cheap. In this recent increase, low returns on fixed-income investments also made equities attractive, so that helped the multiple expand. Also, some investors could just be chasing momentum.

To David Kostin at Goldman Sachs Group Inc., the valuation party may end soon. He expects the market’s forward price-to-earnings ratio will shrink to 16 in the second half of next year. That means the increase in prices won’t even keep up with the increase in earnings. In his view, that will leave the S&P 500 at 2,100 by the end of the year, which would mean only a 1.6 percent gain from last week’s close and a 2.5 percent advance from when he made the call less than two weeks ago.

Rates Rule

What’s one of Kostin’s main concerns? Interest rates, of course.

First, the strategist expects the index to climb as high as 2,150 in the first half of the year and reach a forward P/E of 17. Then, as the Federal Reserve begins to tighten its monetary policy, the index will peak and by year-end it will slip back to 2,100 with a forward P/E of 16.

In the other corner, Morgan Stanley’s Adam Parker believes more multiple expansion is in the cards, albeit a “modest” increase to 17 times forward earnings. Coupled with 7 percent earnings growth, the benchmark index will reach 2,275 by the end of 2015, according to Parker. That’s a 10 percent gain from last week’s close.

What’s one of Parker’s main reason for being so bullish? Interest rates, of course.

Despite the likelihood of a Fed rate increase, Parker points out that 75 percent of consumers’ financial obligations are mortgage payments and 90 percent of all home loans are fixed at the lowest rates ever. For that and other reasons, he wrote today that the economic expansion could last until 2020.

Who is right? Well we won’t know until the end of next year. Because hindsight, like Parker’s economic-growth forecast, is 2020.

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Forecasts for stock-market performance tend to pile up faster than snow in Buffalo at this time of year, and among the blizzard it's notable that two of the highest-profile prognosticators disagree on one fundamental issue: valuations.
Morgan Stanley, Goldman Sachs, stock, bond
452
2014-43-01
Monday, 01 Dec 2014 11:43 AM
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