Morgan Stanley's Adam Parker: S&P Hits 1,167 in 2012, Multiple Contracts With Low Rates, Earnings Plateau

S&P 500 through 2012
(via freestockcharts.com)
Adam Parker, chief equity strategist at Morgan Stanley, has a bearish outlook on the S&P 500 for 2012 with a year-end price target of 1,167. The S&P is currently trading at 1,289. The interesting part about his call is that he thinks the S&P's price/earnings multiple will contract "to 10x over time" because rates are low. He was on CNBC on January 3 and 9 discussing Morgan Stanley's report, see quotes below. To hedge himself, I noticed a CNBC slide that said he could be wrong if there is QE3, a meaningful cyclical upswing, or the U.S. government addresses the debt situation (wouldn't that sell off the market?). I found a quick summary of Parker's S&P call at Morgan Stanley's Global Strategy Roundup.

"US Equity Strategy: The 2012 Playbook
Adam S. Parker et al.

We establish a 2012 year-end price target of 1167 for the S&P 500, representing 7% downside from today's price and around 13% more conservative than the "muddle through" scenario implied by consensus. While 2011 was about multiple contraction, and further contraction is likely, we think 2012 and 2013 are likely to be more about earnings than the multiple. Our 2013 EPS estimate for the S&P 500 of $103.1 is 15% below the consensus bottom-up view of $121.1."

They also lowered their 2012 EPS estimate for the S&P 500 to $100 from $103. Parker discussed his market call with Jim Cramer and David Faber on CNBC on January 3.

"1) The profits we've seen and the guidance we've seen from companies in December have been weaker across tech, across retail etc, and I think that might mean April guidance during the January earnings season is disappointing. 2) Virtually every economy in the world, maybe outside of Japan, will see decelerating GDP in the next couple of quarters. So you're going to have that sensation that things are slowing. 3) And you've talked a lot about this a lot on your program, is the dollar's really strengthened materially over the last several weeks, and that provides a headwind for corporate profits as we head into January, and guidance for April. So I see a little bit of a soft patch on earnings. Remember our main call has been on the multiple. So you have the earnings and then the multiple you're going to pay. The multiple came down a lot last year. I think this year is going to be a little bit more about earnings as we head throughout the year."

More on the multiple.

"You don't pay more for earnings when they are propped up by fiscal stimulus, accommodative policy, etc."

"I don't believe that because rates are low that makes equities more relatively attractive. I think when rates get low, the equities premium actually rises..."

A week later, Parker discussed his views with CNBC's Fast Money on January 9.

"But, you know maybe the multiple goes to 10x over time, and we still think that's the case. And the push-back is less about growth and maybe more about rates. What people say is, "well when rates are low you should pay a higher multiple for the earnings". We disagree. We think when they are this low, they are this low for a reason. It's because things are kind of messed up. So we're not going to pay a big multiple for earnings. I think that's a key point we are trying to make"

Interesting call. Here's are more articles: A New Year, the Same Ol' Pessimism (WSJ), Morgan Stanley Issues Shocker With First 2012 Forecast: Says S&P Will Close Year At 1167, Sees Consensus As Too Optimistic (Zero Hedge).

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