“We remain in a bull market that started in March, and even though one should expect corrections along the way, the equity market may have more legs before it tops out. We raise EPS estimates and index targets,” the Morgan Stanley report titled “Bullish, Et Tu?”said.
The research report said that the stock market would rise 15% more than the current levels.
“COVID-19 infections appear to have peaked, high-frequency growth indicators are coming in strong, government policy action is beating expectations, and Indian companies are picking up activity through the pandemic,” the report said. We expect the broad market small and midcaps to beat the narrow indices or large caps in 2021 because we think concentration of market cap and profits may have peaked with the return of the growth cycle. We also think portfolio returns are more likely to be driven by bottom-up stock picking rather than top-down macro forces, so keep sector positions narrow. Return correlations across stocks with the equity market have risen to levels from where they tend to mean-revert, it said.
While earning per share or EPS for many listed entities remains a concern, most companies have managed to alter their strategies fast amidst Covid pandemic.
The report said that as revenues slowed during COVID-19, companies were quick to cut costs to protect margins and profits relative to expectations. “We are now seeing an improvement in earnings estimate revisions, breadth and earnings estimates. Some companies used the market buoyancy to raise equity capital and mitigate tail risk to the business or increase capital for growth. In recent months, issuances were the highest ever if the infusion of capital into public sector banks by the government is excluded.”