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Could Stock Market ‘Elephant’ Drag Down S&P to 1238?

Monday, 18 Jul 2011 | 6:36 PM ET

Once the US stops quibbling over the debt ceiling and Europe gets its financial crisis under control, the S&P should resume its march higher, right?

Not necessarily.

Morgan Stanley chief US equity strategist Adam Parker tells us the second half of the year could be rough.

”Our year end target for S&P is the 1238,” he says.

Now, we know what you’re thinking - that Parker must be another one of those gloom and doom doctors.

Well, he's not. He's not looking for banks to implode nor is he forecasting a surge in gas prices. That’s not his thesis at all.

In fact, he’s optimistic that companies will continue on their current trajectory. “We see earnings growth,” he admits.

Then why the bearish S&P estimate?

Red Flags in Second Half of 2011
Why it's time to brace for a selloff in the second half of this year, with Adam Parker, Morgan Stanley chief US equity strategist.

Because Parker thinks earnings strength will be more than offset by the multiple investors are willing to pay for those earnings.

Of course that begs the question, why would investors demand a reduced multiple or only be willing to play less of a premium?

According to Parker that’s the elephant in the room. He thinks the current market environment, one of exceptionally easy money, is unsustainable and is going to have to change. "That's going to have to unwind at some point." Also Parker thinks the political will in Washington to address debt will reduce growth.

And that’s probably leads to a sea change - one that takes time and lasts a while.

"That’s why I think the long-term trend is for a lower multiple for earnings. It’s about a change coming in the future.”

In fact Parker thinks the future multiple for the S&P will be about 10 times earnings, though he concedes it will take years before that happens. "That's a long-term path and by the way there are other market's trading near that multiple today, so it's not as insane as it might seem," he says.

And for what it's worth, the market multiple has already started to contract. "This year it's gone from 13.5 for 12.7," says Parker. "We've seen it already I just think there's going to be more."




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