We should expect another fall of 10% in the S&P 500, if corporate margins come in weaker than expected in Q2, according to Societe Generale’s Patrick Legland and Daniel Fermon.
Legland and Fermon believe that the costs of the end of QE2 have not yet been priced in completely. They expect the 10-year yield to remain around 3%, based on concerns over the debt ceiling, and commodity prices to stay high, due to low supply and high demand. But equities are another story.
From Societe Generale:
Thanks to good surprises from corporates, equities have been very resilient despite the number of tail risks observed this year. As already mentioned, US economic data are also worrying, with unemployment still high at 9.1% and property markets falling further. As of today, the economy seems unable to replace the Fed’s substantial monetary and fiscal stimulus to provide sustainable growth, hence the dollar’s decline, falling roughly 20% from the peak of March 2009. If corporate margins disappoint in Q2, a 10% market correction over the summer could be expected, as occurred at the end of QE1.
Note the sell off after the real end of QE1. This may happen again, according to Soc Gen.
Photo: Societe Generale
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