S&P 500 Will Someday Go To 3,000.

A lot of Wall Street buzz and guru punditry out this week discussing a report from Morgan Stanley suggesting that the end of this current market cycle could be years away and could ultimately peak out around 3,000 on the S&P 500.  That's another 50% rise based on prices at the time the article was published.  You can find a summation of the article over at "Business Insider".  Here's the link.  The chatter by the TV talking heads and over the internet, as you can imagine, runs the spectrum from using the article as evidence of a blow off top in prices to the folks citing it as a reason to go out and purchase equities today.    Those pointing to evidence of a top note that one of the authors, Adam Parker, was once one of Wall Streets more strident bears on the market.  

To me it seems a rather silly thing to waste a lot of time over.  The S&P 500 will eventually get to 3,000.  You have to believe this if you believe in the economic progress of both the American and world economy.  If you don't then you probably shouldn't be invested in the markets.  I think the issue here is one of time.  Now I haven't read the original Morgan Stanley research note and I'm therefore relying on the summaries I've read.  Having said that the main point in the research note regarding how we get to 3,000 on the S&P 500 seems to be 5-6 years left of economic expansion, coupled with 6% annual growth in earnings which leads to a 17 PE multiple out in the future.  Based on that line of reasoning, it's hard to fault the underlying argument.  Here's my thoughts.

Right now the major danger to this scenario is likely an unlooked for event.  The world's a mess and there are probably 5-10 crisis points out there that could burst into a larger event.  A crisis such as a war would be bad for stock prices.  As would an unlocked for natural event {major earthquake in Los Angeles for example} or man made disaster {something like the Fukushima nuclear crisis}.  The problem with future events is that they can't be predicted and may never happen or at least not occur during the time frame we're discussing here.  You can't manage assets based on expectations of these other than to have a go to plan such as our playbook when they occur.  

The bigger problem in the research report may be that the timing will turn out to be wrong.  Prices might get to 3,000 eventually but  it could take us possibly more years than the article seems to suggest to get to that point.  The reason for this could be that earnings, pegged to grow annually about 6%, as well as market gains probably won't be linear.  There's probably also a down year in our future at some point or perhaps a period like most of 2011-2012 when stock prices basically went nowhere.  

When I was a whelp of a young broker, I learned a basic formula from the gentlemen that taught me the business.  That was 3% population growth, 3% inflation and 3-4% GDP growth basically gave you a 6-7% rise in corporate earnings.  In a normal year that formula gave you an S&P market multiple between 14-17.  That formula has worked pretty well over the years, although I think that secular headwinds will reduce that GDP growth rate to 2-3% in the coming years.  Using assumptions like these is why I don't have a problem with Morgan Stanley's analysis.  Probability suggests that it could take us longer to get to that point, perhaps 6-9 years instead of the 5-6 the article seems to suggest.  Therefore, put me in the camp that suggests it's a matter of when the S&P 500 get to that point, not if we can get to 3,000.

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.