Morgan Stanley Eyes 7% Slump for S&P 500 in 2012

Concerned about Europe’s scary sovereign debt crisis, forecasters at Morgan Stanley (NYSE:MS) have taken a cautious view on 2012, predicting the S&P 500 will slump 7% after a turbulent 2011 on Wall Street.

Adam Parker, Morgan’s U.S. equity strategist who was among the most accurate forecasters last year, released a research note on Tuesday establishing a year-end price target of 1167 for the S&P 500. Given consensus calls for the S&P to land at 1350, the Morgan Stanley prediction is substantially more conservative.

Parker pointed to a trio of factors that are likely to conspire to drag down the stock market: a deceleration in global gross domestic product “in nearly every major geography,” a stronger dollar that will hurt exports, and weak earnings forecasts from companies like Oracle (NASDAQ:ORCL) and FedEx (NYSE:FDX).

“We think the risk-reward is skewed to the negative,” Parker wrote in the note. “While 2011 was about multiple contraction, and further contraction is likely, we think 2012 and 2013 are likely more about earnings than the multiple.”

Morgan Stanley said its “bear case” for the S&P 500 is 944, while it’s “bull case” is 1450.

Parker slightly downgraded his 2012 EPS forecast for S&P 500 companies to $103 from $100 and projected a 15% decline in 2013 earnings.

Morgan Stanley’s forecast is most below consensus estimates on materials, financials and technology stocks in 2012, while its 2013 view is more negative than the consensus in industrials, energy, materials, consumer discretionary, telecoms and financials.

Concerned about too-optimistic earnings estimates and the global economy, Morgan downgraded the energy sector from market weight to underweight, but upgraded industrials from underweight to market weight due to more favorable valuations.

Wall Street didn’t appear to be spooked by the Morgan Stanley conservative forecast as the Dow Jones Industrial Average surged 250 points and the S&P 500 leaped 2.1% Tuesday morning in a very positive start to 2012.