UBS is very confident 2011 is going to be a good year. It has laid out its equity strategy for 2011 with a raise in its year-end S&P 500 Price Target to 1,425 up from 1,325.
The firm has updated its earnings and valuation outlooks based on improved GDP forecasts as well as better margins and increasing dividends, buybacks and M&A activity.
A more business-friendly Washington will also help.
EPS growth rates are expected to remain above average for this year before returning to a more normal 8-9% in 2012.
The December tax compromise helped economic data beat analyst expectations for five months in a row.
UBS's first quarter GDP forecast expects 4.2% growth, a 1% improvement from 4Q results.
Surges in revenue and margin expansion in combination with improving GDP have all contributed to earnings growth.
Typically earnings surprises decline as recovery matures but current quarter results are showing an increase.
These activities will all boost stock price growth and please shareholders.
Dividends have a historically tendency to move higher and this pattern is expected to continue in 2011.
M&A activity is also ramping up this year. Large cash balances, business confidence, still-low valuations and a large gap between large and small-cap margins will all contribute to this movement.
UBS analysts expect the market to end its five-month growth run soon and when it does it will be a huge buying opportunity.
Risks such as inflation and more monetary policy issues are expected to rise over the year. 'Should macro risks remain in check, we believe there is substantial upside to our earnings and valuation forecasts,' wrote analyst Johnathan Golub. 'While investors might not see this as a risk in the traditional sense, under-investing in a powerful recovery could prove to be a negative.'
UBS finds these three sectors to be the most attractive and has given them all overweight ratings.
Technology: Sector remains attractive and has promising long-term revenue growth
Industrials: Good margins and upside potential
Financials: The sector is being boosted by a better investment banking environment and good valuations.
UBS is underweight on staples, telecom and utilities.
Consumer Staples: Companies exposed to low-end consumer spending will drag down the sector, especially if employment stays low
Telecom: Rising interest rates and a long-term competitive environment are not enticing
Utilities: Rising interest rates and environmental regulation risk are not helpful
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