S&P 500 Index: In search of a new catalyst to rise further - Morgan Stanley

FXStreet reports that the S&P 500 Index has reached new all-time highs in the past few weeks driven by an impressive series of positive economic surprises. Economists at Morgan Stanley remain bullish overall and still expect a powerful V-shaped economic recovery next year. However, the benchmark index of the broader US market has already priced in a great deal of optimism about the year to come and some positive catalysts may have run their course.

“Corporate earnings growth could average 25% in 2021, according to a consensus estimate compiled by FactSet. Positive earnings revisions are now running at their swiftest pace in more than 20 years. Forward price/earnings multiples are at extreme levels relative to the past 20 years (22 vs. 15 historically for the S&P 500). This is despite the fact that inflation expectations and long-term interest rates are rising. Those conditions typically lead to lower stock multiples, which we expect.”

“The Fed has committed to keeping its key short-term interest rate near zero through December 2023 and has already deployed every means possible to stimulate the economy, leaving it with only modest short-term tools. Many investors expect another round of federal government stimulus, to the tune of $900 billion, which seems the largest package that a divided Congress would likely pass.”

“It will likely take new catalysts for stocks to rise further from here. A Democratic sweep in Georgia Senate races that could lead to an expansionary Biden agenda around infrastructure could be one outcome that isn’t yet priced into markets. But given current polling, the probability of that happening is only 20%.”