Morgan Stanley Says the S&P 500 is Actually Undervalued

Herd of bullsThe SPDR S&P 500 ETF Trust (NYSE:SPY) is primed for more gains this year, says Morgan Stanley, calling the U.S. market “the best one in the world.”

In a research note to clients, analyst Adam Parker cited expectations for better earnings growth as the main catalyst that will drive higher prices. U.S. prospects also look better than the rest of the world:

“Because we think EPS expectations are reasonably achievable for the next two quarters, that the base case for the U.S. is positive earnings growth, whereas it is a decline in any other region of the world.”

Buybacks, dividends, and a dominant amount of mega-volume companies also play into his bullish view:

“[The S&P 500 features] a 2.3% net buyback, a dividend yield over 2%, plus over 70% of all equities in the world with $100 million or more in daily trading volume.

You start finding it difficult not to allocate some meaningful capital to at the very least a high-quality basket of U.S. equities.”

Despite an already-high P/E ratio, the Morgan Stanley analyst also says that price-to-earnings has room for expansion. In fact, he expects 4% earnings growth every year through Q1 of 2018.

The SPY fell $0.28 (-0.13%) to $218.40 per share in premarket trading Friday. SPY has gained 7.26% year-to-date.


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