Cautiously optimistic or, as it’s come to be known, “rational exuberance” is the new “bearish.”
Wall Street’s year ahead outlook pieces have generally stuck to the “Goldilocks” theme that calls for what amounts to a repeat of 2017 – synchronized global growth but still subdued DM inflation. That’s a “have your cake and eat it too” type of deal because it allows everyone to posit a continual upturn in global growth while simultaneously clinging to the idea that central banks will have an excuse to remain accommodative.
But that’s not good enough, dammit. A repeat of 2017 – a year that’s seen all kinds of “best streak since” moments and which has been characterized by an across-the-board rally in risk assets of all stripes – is being characterized by the punditry and by investors as something that is too boring. It’s “yesterday repacked as tomorrow” (to quote one commentator).
Even as the consensus 2018 year-end target for the S&P is 2,800, everyone wants more. It’s almost as if the standard for “bullish” is now being set by Bitcoin and short vol. If you aren’t projecting triple-digit returns, well then you might as well join Albert Edwards in the permabear camp.
So if that’s the new bearish, well then I suppose Morgan Stanley is going to be castigated as a gang of nefarious doomsayers, because while they’ve lifted their target, it’s still “just” 2,750. To wit, from their 2018 outlook:
We move our base case S&P target to 2,750 from 2,700. The increase is a result of higher earnings (US$145 in 2018, US$150 in 2019) and a roll forward to 2019 earnings, but at a lower multiple (18.3x) than we previously thought as the market will not reward this later-cycle growth with multiple expansion as in 2017. Tax reform is a wild card, with implications for earnings, risk-taking, investment, personal income and the Fed. We think that tax cuts are necessary for forecast earnings growth but we could see too much of a good thing as tax reform may unleash animal spirits, leading to an overshoot of our target.
We expect any such blow-off top to be greeted by a more hawkish Fed, which is a risk, given the build-up in corporate leverage. We remain positive on equities and prefer late-cycle, investment geared sectors like energy, financials, industrials and technology, but note that the risk/reward is not what it was this time last year.
Again, considering how high the bar is for “bullish” these days, that might as well be a dour outlook, especially the bit about “animal spirits” triggering a “blow-off top” that prompts the Fed to move in for the proverbial kill.
Additionally, Morgan’s Chief U.S. Equity Strategist Mike Wilson says the following about H1:
We would not be surprised if we reach [the year-end] target during 1H2018 and it marks the high for the year.
That recalls BofAML’s Michael Hartnett who said virtually the same thing earlier this month, although his blow-off top target was higher:
We forecast a H1 top in risk assets as the last flames of QE, US tax reform and robust EPS incite full capitulation into risk assets…targets SPX 2863, CCMP 8000; AA: equities>bonds, EAFE>US, gold>oil, bullish US dollar.
So there you go, you can add Morgan Stanley to the list of people who are bullish, but not nearly bullish enough for a world that’s been conditioned to think exponential gains are somehow the norm.
