An analysis released Tuesday by Morgan Stanley analyst Adam Parker suggesting U.S. equities will finish the year more than 8 percent lower than where they began is making those who follow the American stock market nervous. And for good reasons, too -- Parker nailed his prediction as to where the S&P 500 would end in 2011, forecasting the index would finish the year at 1,238. The index closed last Friday at 1257.60, 1.58 percent off Parker's call.
Parker's bearish new scenario calls for the benchmark U.S. stock market index to finish the year at 1,167, down 8.6 percent from Tuesday's close of 1,277.06. The prediction is an outlier in the small world of Wall Street bank strategists: the consensus view is the S&P 500 will rise to 1,388 by year's end.
"While 2011 was about multiple contraction, and further contraction is likely, we think 2012 and 2013 are likely more about earnings than the multiple," Parker wrote in Morgan Stanley's 2012 Playbook, according to Business Insider.
In his note, Parker noted the drop in U.S. stock prices will come not only due to Gross Domestic Product contraction across various world economies and a relatively strong dollar (which dampens American export activity), but also as a result of disappointing earning announcements and weak outlooks. He cites recently lowered guidance by companies like Texas Instruments (Nasdaq:TXN), Oracle C (Nasdaq:ORCL) and Darden Restaurants (NYSE:DRI) as examples of what's to come.
Parker's point, that other Wall Street analysts are over-estimating the potential earnings S&P 500 companies will deliver in 2012, is brought home by the fact, as he notes, the consensus view sees Bank of America (NYSE:BAC) driving 14 percent of the S&P earnings growth this year.
Parker's dim view of the equity markets is only the latest in a series of events where Morgan Stanley has been at the epicenter of depressing outlooks on Wall Street. After announcing on Dec. 15 it would lay off 1,600 people in the first quarter of this year, the bank notified the state of New York last week it had already given 580 employees there a pink slip.