David Darst Morgan Stanley Strategist
Image: Fox Business News
Morgan Stanley Smith Barney Chief Investment Strategist David Darst
Earlier this weekend, we ran Morgan Stanley's 8 risks to the equity markets in 2012.
This theme is fitting for Morgan Stanley since they are among the most bearish firms on the street.  Their U.S. equity strategist Adam Parker thinks the S&P 500 is headed to 1,238 in a year.
However, along with its 8 bearish factors, Morgan Stanley (via Morgan Stanley Smith Barney's David Darst) offers 6 bullish factors.
And here they are:

  • Factors arguing in favor of equities include: (i) negative real interest rates and possible further monetary stimulus; (ii) robust S&P 500 profits (+18.9% y-o-y for 1Q2011; 12.1% y-o-y for 2Q2011; +17.9% y-o-y estimated for 3Q2011; and +10.0% y-o-y estimated for 4Q2011); (iii) continued GDP growth in emerging Asia and Latin America; and (iv) a likely soft landing in China (Morgan Stanley continues to estimate real GDP growth of 9.0% in 2011 and 8.4% in 2012).

  • As of Dec. 9, the consensus of analysts’ forecasts for S&P 500 calendar-year earnings growth is 15.0% for 2011 and 10.1% for 2012, according to Thomson Reuters.

  • Producer and consumer price inflation rates have risen from low levels and deflation risks have faded significantly.

  • Equity 12-month forward price/earnings ratios are not excessive and the earnings yield (the inverse of the P/E ratio) is at very high levels relative to Baa corporate bond yields.

  • High US corporate cash levels, which enable increased dividend payouts, stock buybacks, and mergers and acquisitions activity.

  • Recent leading economic indicators, inventories, exports, employment, industrial production, railcar loadings, factory output, automobile sales, personal income, retail sales, ISM manufacturing and non-manufacturing data still reflect continued expansion.