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Morgan Stanley's Boosts Its S&P 500 Price Target For 2014 To... 2014

Tyler Durden's picture





 

When even the big banks are openly mocking price targets and resorting to sheer gimmickry (recall Topeka's AAPL price target of $1,111) it may be time to take a long, hard look at the sell button. However, since only the rise in the Fed's balance sheet matters, that long, hard look will end up with precisely zero action.

From Morgan Stanley:

Since last March, we have been sanguine on US equities. Our logic has been driven more by lack of a bear case than the strength of the base case. We have seen 3 turns (12.0x to 15.1x) of multiple expansion in the last 2 years, only the 4th period with this level of expansion over the last 40+ years. Obviously, a sample size of three isn’t statistically significant, but the prior three periods were all followed by a continuation of the rally for another 12-24 months, as momentum typically persists. The only thing people are worried about is that no one is worried about anything. That isn't a real worry.

Sheer brilliance (but yes: one can thank the Fed for drowning all "worries" with record liquidity). The brilliance goes on.

We are raising our 12-month S&P 500 price target from 1840 to 2014, representing 11.5% upside from the market's current level (Exhibit ). In our base case, we are forecasting 6% earnings growth in 2013, 2014, and 2015. We expect the multiple to expand moderately (the index currently trades at 15.6x our 2014 earnings estimate) to 16.4x. For our bull case target of 2414, we see 8% earnings growth in 2013, followed by 10% EPS growth in 2014 and 2015, and strong multiple expansion to 17.9x. Our bear case is 1519 and assumes a 5% earnings decline in 2014 accompanied by multiple contraction to 14.9x.

 

 

 

Why a 9.5% increase in our price target?

 

1) We raised our earnings numbers for Q4 2013: The Q3 numbers were better than we expected, again primarily driven by the financials sector. Generally, while the bottom-up estimates have consistently been too high, our top-down model for forecasting earnings has been consistently too low. When we update our 2013 numbers for a stronger Q3 and add to our Q4 forecast, we now estimate $109 in 2013 EPS. This is well above our initial forecast from two years ago of closer to $100, but well below the initial consensus bottom-up estimate of nearly $123.

 

2) Roll forward: We also rolled forward our 12-month forward target from end of Q3 to year-end 2014. This has the effect of adding our Q4 2015 EPS estimate, as our target is set off of earnings months 13-24 in the future. Our Q4 number for 2015 adds $2.90 more in EPS to the outlook. So this makes our 2015 EPS full-year forecast $122.9 in earnings, roughly equal to the consensus bottom-up view for 2014 EPS and likely about $8 below what will be the 2015 consensus bottom-up number when the estimates are fully fledged out early in 2014.

 

3) Multiple expansion: For our base case we have raised our PE assumption by about 3/4 of a turn. Our fundamental view is that a steeper curve and the lack of a bear case forming will cause multiple expansion, consistent with what we have written about in several recent notes.

 

4) Net earnings: It is important to note that there is a 3% per year net share count reduction ongoing right now, likely meaning 5-6% total share reduction between now and year-end 2015. My sense is some investors may not realize that net earnings growth will be closer to 9% per year, even though the exhibit above, which is OPERATING earnings, shows 6% growth. All individual stocks are typically evaluated by analysts (with targets) on net earnings, not operating earnings, and in this environment of huge repurchases this is an important distinction.

About that multiple expansion, recall:

... multiple growth has already been thoroughly abused as a source of stock market "growth", and accounts for over 80% of the market upside in the past two years, and is responsible for 75% of the S&P increase in 2013. Excluding the 2009 "outlier" event, this is the greatest contribution to the S&P from multiple expansion in 15 years.

 

So will Morgan Stanley's price target for 2015 be 2015, and so on? Said otherwise, when things like fundamentals and technicals no longer matter, things get silly fast.

 


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Mon, 12/02/2013 - 10:59 | Link to Comment fonzannoon
fonzannoon's picture

I saw the head MS moron David Darst on TV last year around this time. His 2013 prediction was for the S&P to finish negative 7%.

 

Mon, 12/02/2013 - 11:01 | Link to Comment idea_hamster
idea_hamster's picture

“The only thing people are worried about is that no one is worried about anything. That isn't a real worry.”

 

So, the only thing we don’t have to fear is the lack of fear, itself?

Mon, 12/02/2013 - 11:04 | Link to Comment eclectic syncretist
eclectic syncretist's picture

"Ain't nothing can scare a wino.......cept' runnin' out of wine.  That's the only thing that can panic a wino."

Richard Pryor-

Mon, 12/02/2013 - 11:10 | Link to Comment idea_hamster
idea_hamster's picture

"wino" (read: "POMO")

Mon, 12/02/2013 - 11:11 | Link to Comment Dr. Engali
Dr. Engali's picture

I wonder what CNBC will do once they lose you as there last viewer. If there is nobody there to watch the propoganda can it still be heard?

Mon, 12/02/2013 - 11:12 | Link to Comment fonzannoon
fonzannoon's picture

I'm guessing you are talking to me. I am long CNBC Doc. I'm, long CNBC and gold miners, because something is seriously wrong with me. It's about time you all knew this. I want to see which one turns their scenario around first.

Mon, 12/02/2013 - 11:19 | Link to Comment Dr. Engali
Dr. Engali's picture

There is something wrong with all of us Fonz. I hope you had a good Thanksgiving. I didn't see Kito in a black Friday You tube video so I'm guessing he made it through the chaos without getting trampled.

Mon, 12/02/2013 - 11:23 | Link to Comment fonzannoon
fonzannoon's picture

Thanks Doc, I did and hope you did as well. Kito actually travelled through your State I believe on Amtrak on a thanksgiving trip through several states. He is currently stranded I believe as his train home is running like 10 hours behind schedule. 

Mon, 12/02/2013 - 16:13 | Link to Comment Greenskeeper_Carl
Greenskeeper_Carl's picture

I hear you on being long miners. I have watched them get hammered over the past few months, wondering why I didn't sell gdxj when I was up 15 dollars a share. My dad thinks I am crazy for dumping ups and buying phizz and miners. The miners will have their day one day, I hope. Or I just wasted a few thousand dollars. It sucks too, cuz on one hand I hate seeing the miners I own getting hammered by these gold prices, but at the same time I also hope they keep this up a while so I can keep buying more physical at what I truly believe to be the best bargain we will ever see. I'm masochist at heart I guess

Mon, 12/02/2013 - 13:11 | Link to Comment Cacete de Ouro
Cacete de Ouro's picture

Darst is a showman....a funny guy with a good speech, like the father at a wedding who attends Toastmasters, but I'd just take it as that...entertainment

Mon, 12/02/2013 - 10:59 | Link to Comment NoDebt
NoDebt's picture

I like the bull case better.  2414.... oooh, I just got a nose-bleed.

Mon, 12/02/2013 - 10:58 | Link to Comment orangedrinkandchips
orangedrinkandchips's picture

I hold these truths to be sefl-evident....

 

1) There is no free lunch!

2) If it is too good to be true IT IS!

 

 

Mon, 12/02/2013 - 11:00 | Link to Comment Sudden Debt
Sudden Debt's picture

nobody worries when the humping is going on but when they come nobody pulled back on time...

Mon, 12/02/2013 - 11:05 | Link to Comment Kina
Kina's picture

I would say 241,400

 

That would be after China dumps $500bn USD

Mon, 12/02/2013 - 11:08 | Link to Comment Dr. Engali
Dr. Engali's picture

My prediction for 2014 is that the U.S will continue down the toilet bowl while the market and old Yellers balance sheet continue higher.

Mon, 12/02/2013 - 11:09 | Link to Comment El Hosel
El Hosel's picture

What the hell are they looking at?  On pace to hit  2014 by May 2014

Mon, 12/02/2013 - 11:10 | Link to Comment HaroldWang
HaroldWang's picture

Hard to argue when PMI and Construction Spending are continuing to rise. More positives for the economy and growth going forward. Seems all of the money in the system is actually starting to show up in growth

Mon, 12/02/2013 - 11:30 | Link to Comment Toolshed
Toolshed's picture

Some people will believe anything they are told, I guess, despite the mountains of glaring evidence to the contrary. BTFATH!!!! That's a good sheeple.

Mon, 12/02/2013 - 11:39 | Link to Comment chinaboy
chinaboy's picture

That does not sound to good for the year 2015, does it?

Mon, 12/02/2013 - 11:40 | Link to Comment RaceToTheBottom
RaceToTheBottom's picture

Why not ask the FED where the S&P will end up?
They are the only buyers of S&P equities.

Retail has either been raped to oblivion or will just not play.

Mon, 12/02/2013 - 11:44 | Link to Comment moneybots
moneybots's picture

"... multiple growth has already been thoroughly abused as a source of stock market "growth", and accounts for over 80% of the market upside in the past two years, and is responsible for 75% of the S&P increase in 2013. "

 

In other words, the S&P isn't really worth anything close to what the price is artificially jacked up to be?

Mon, 12/02/2013 - 14:02 | Link to Comment FieldingMellish
FieldingMellish's picture

When you can't see the black swan, you are standing right next to it.

Mon, 12/02/2013 - 16:53 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

Well, when it's over Yellen can get a cameo spot in a Dr. Schole's commercial. 

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