The Michael Shearin Group

Adam S. Parker, Ph.D.
US Equity Strategist
Morgan Stanley & Co.

Our 2014 forecast for the S&P 500 Index is 2,014. That may look like a big number, but it doesn’t take a giant leap to get there. It represents 9% potential upside from the 2013 close, driven by our estimate of 6% operating earnings growth, net 3% share repurchases and modest expansion of the forward price/earnings (P/E) multiple. Relative to our prior view, this represents about a 0.8 turn more in the P/E multiple—and there is potential for more. The low dispersion of price/forward earnings and higher company-specific risk lead us to conclude that a more concentrated portfolio will be prudent this year.

Multiple Expansion

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 three turns of multiple expansion in the last two years as the P/E moved to 15.1 from 12.0—only the fourth period with this level of expansion over the past 40-plus years. Obviously, a sample size of three isn’t statistically significant, but the prior three periods were followed by a continuation of the rally for another 12 to 24 months, as momentum typically persists. The only thing people are worried about currently is that no one is worried about anything, which isn’t a real worry...