FYI | Nov 02 2006
By Rudi Filapek-Vandyck
Morgan Stanley Chief US Investment Strategist Henry H. McVey believes US equities may be in for some weakness following a bumper performance in October.
McVey draws part of his prediction from technical analysis stating the S&P500 index is likely to run into technical resistance at 1370-1385. In addition, McVey sides with colleague and global strategist Stephen Roach that overall investor sentiment is “over done”. A pull back seems but the logic result.
Morgan Stanley recently revised its year end target for the S&P500 upwards after the index reached its previously set target for the year in October already. Two weeks ago the target went up to 1375 from 1350. The broker also set an initial 2007 target of 1475 at the time.
The rise in end of year target for what is arguably the most important index when it comes to US shares went hand in hand with an increase in the expected average EPS forecast for the companies represented in the index: to $86.25 for 2006 and to $91.00 for 2007.
In an update on matters, McVey argues for the index to reach its 2007 year-end target the US yield curve needs to become less inverted. This is seen as the key to further expansion of PE multiples for US stocks.
In general terms, Morgan Stanley favours three key macro themes in the year ahead for US equities: Pricing Power, True Growth/Innovation, and Rising ROE.