Two years ago, Morgan Stanley said we were in a multi-year bull market that started in March 2009 and could last two years or longer.

Sure enough, the S&P 500 from then until now is up 96 percent.

So there is reason to listen when the firm says its current outlook for the equity market is quite different. While equities may have a bit further to climb in the short term, outsized returns won't last long, said David Darst, chief investment strategist. 

“We do not believe we’ve started a new, long-run bull market until we get three things,” Darst said, including “compelling valuations,” “societal disgust and revulsion with the status quo,” and “structural change.”

Darst is edging out on a limb. Morgan Stanley has a much lower forecast than others. The firm is projecting S&P 500 earnings growth of just 2.7 percent for 2012 and -1.3 percent for 2013. The broader consensus (according to Morgan Stanley) is 5.1 percent growth for 2012 and 10.8 percent for 2013.

The S&P 500 is up about 10 percent this year alone. But looking at the market's total return presents a more complicated picture. In the 1930s, stock prices were down 5.26 percent, but returns from dividends were 5.59 percent, according to Morgan Stanley. In that measure, investments were better in the 30s. Equity prices dropped 2.72 percent in the the first decade of this century while dividend returns were only 1.76 percent.

Low earnings growth, low dividends and the fact that people just aren’t putting money into the equities like they used to, creates a pretty bearish perspective.

Darst is a polymath and in his entertaining rant - zigzagging from China reforms to Isreali privatization schemes to current tax policy - he said he was amazed at where institutions are parking their money. He went down the list: central banks are putting money into government paper; banks are putting money into short-term, liquid investments; corporations are holding their money in cash; and pensions, endowments and foundations are putting their money into alternative investments. Meanwhile, the mega-rich are putting their money into art and trophy real estate.

“Rich people are not putting their money into productive assets to create jobs; they’re putting their money into protective assets,” Darst said. “What’s missing? Stocks. Not a penny’s going into stocks in the big flows these days.”

Mainstream investors, Morgan Stanley’s clientele, continue to put money into bonds. In fact, $1 trillion has poured into bonds, while $500 billion has come out of stocks, Darst said.

Why? Investors still don’t trust the financial system, because of scandals like the flash crash, MF Global’s bankruptcy, Bernie Madoff, and Knight Capital’s trading glitch. They’re also traumatized by the two financial meltdowns in the last 10 years, Darst added. At the same time, there are 77 million baby boomers transitioning to retirement that want yield.

“Stimulus is not the answer,” Darst said. “Stimulus is a stop-gap measure. Stimulus is Tylenol, OxyContin.”

Structural reform is the answer, Darst said. Younger generations need to save and invest, but right now interest rates are too low to attract millennials. Structural reform also involves a focus on education, at home and at school, as well as investments in infrastructure.

“Markets don’t change when fundamentals change,” Darst said. “Markets change when beliefs change.”

Despite Darst’s long-term bearish picture of the stock market the firm recently added to its European equities position as well as to its already overweight position in domestic equities.

While revenues are currently soft with the economic slowdown, margins have held up, said Charles Reinhard, deputy chief investment officer. To be sure, global growth has slowed, but that masks some fast-growing pockets of the world. Developing nations, for example, are projected to grow GDP by 5 percent this year, with similar growth next year.