The S&P 500 has continued to defy gravity throughout 2016, leaving many investors nervous about just how much higher stock valuations can bet stretched. However, Morgan Stanley analyst Adam Parker sees four reasons why the S&P 500 is high and going even higher.
In the past, periods of sub-zero real long-term Treasury yields have corresponded to extremely low S&P 500 PE ratios (under 12.0). This historical trend may be troubling to investors, but Parker is seeing increasing evidence that the current environment is an exception.
“Admittedly, there is limited evidence of a low-risk, extreme real yield regime in the past, but, over the past few quarters we have been arguing that perhaps this historical relationship was broken this cycle,” he explained.
Parker sees four reasons the S&P 500 is headed higher:
- Bond yields are so low that they do not provide a viable investment alternative to stocks.
- There is massive liquidity in the U.S. market today.
- The United States is the only major region with positive EPS growth as a base case.
- Investors aren’t positioned…
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