That s the most recent advice from Morgan Stanley s Chief US Equity Strategist Mike Wilson.
Wilson is keeping his price target for the S&P 500 at 3,900 about 1% below the index s closing price on Monday even though he expects the pace of the economy s recovery to remain strong. Ellen Zentner, his firm s chief US economist, recently raised her forecast for 2021 US GDP to 7.6% from 6.6% because of the large fiscal stimulus that s expected in the form of checks to Americans.
So what gives, and why isn t Wilson following suit with a price-target hike? The S&P 500 index has already priced in much of the expected economic gains for the months ahead, he says.
Then, as now, the S&P was at a 20-year high in terms of valuation, the forward price/earnings ratio then just above 19 and now surpassing 22 – yet for those who choose to compare equity earnings yields to Treasury yields, the gap is pretty close: 3.7 percentage points then versus 3.3 now.
The spread on high-yield bonds has made an almost-perfect round trip in the past year, sitting right at extreme lows, which fits into a sense that generous credit markets are lubricating the economy and markets. Real investment-grade corporate bond yields are scarcely above zero. The Chicago Fed National Financial Conditions Index shows the liquidity backdrop is as loose as it s been this cycle.A clear majority of S&P 500 stocks have dividend yields exceeding the 10-year Treasury yield. While no perfect relative-value indicator, this tends to provide a buffer underneath equity valuation.
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