Morgan Stanley Turns into Extreme Stock Market Bull

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This year already has been a great one for stocks. The S&P 500 Index is up almost 16% after Wednesday’s gains to 1,654 as of mid-day, and the bull market may get another boost if Morgan Stanley is correct in its assessment. Morgan Stanley’s Adam Parker was one of gloomiest strategists out there but has recently changed into a stock market bull. Now Parker sees the S&P 500 Index rising to 1,840 over the next year or so.

If Parker is correct, this is a call for gains of more than 11% from Wednesday’s gains.

Parker previously predicted that the S&P 500 would end 2013 around 1,600. He raised the S&P 500 earnings estimates to $105.50 from $103.00 for 2013 and up to $112.00 from $110.00 for 2014. The SPDR S&P 500 (NYSEMKT: SPY) would have an implied valuation of up to over $184.00 in 2014 versus $165.80 as of Wednesday.

The thesis is a lack of credibility for the bear case. Parker thinks that multiple expansion is coming, implying that the market will be more willing to put higher earnings (or sales and EBITDA) on stocks. If the stock market is valuing the S&P 500 at 15 times earnings, the implication is that the market is willing to value it at closer to 17 times earnings.

Parker pointed out high CEO confidence and low deal flows having been seen so far. Capital spending and new hiring has also been kept low. Inventories building up has also been slow. Mr. Parker believes this could change, hence the multiple expansion. Another gain is coming from debt maturities being pushed way out and companies having near-record cash on the books.

Parker’s new stock market valuations are putting the S&P 500 valuation currently at 15.7 times 2013 earnings and 14.75 times 2014 earnings. Neither valuation is deemed overly expensive based on historical valuations.

We have seen another even more bullish call than this. One stock market technician recently went on record with us in an interview calling for the S&P 500 Index to be entering the next secular bull market. If that prediction comes true then the S&P 500 will rise north of 2,500 in the years ahead. That prediction of a 56% market gain implies a gain to the SPDR S&P 500 (NYSEMKT: SPY) of up to $258.60 before considering the management fees and any possible tracking errors for the ETF versus a share price of $165.80 mid-Wednesday.