Photo: Atreyu142 via YouTube
The S&P has gained 101 per cent since it bottomed in March 2009. But most of the rebound came in the early half of this rebound.In the past two years the market has only climbed 12 per cent characterised by “flatter returns with greater volatility”, according to UBS strategist Jonathan Golub.
Golub just slashed his S&P 500 year-end target to 1,375, from 1,475.
There are three main factors behind the downgrade to the S&P 500 price target:
- The Supreme Court’s healthcare ruling – The ruling is expected to cause greater partisanship at the year-end fiscal discussions. Last year’s U.S. debt downgrade was extremely troubling for markets.
- Disagreement among European policy makers – European authorities agreed to more banking integration, a process to recapitalize Spanish banks, and the potential to use EFSF/ESM to support the market. But a lot of the language is non-committal and there is a rising contentious tone among European policymakers.
- Deteriorating U.S. economic data – Key data including nonfarm payrolls is coming in below estimates.
UBS also lowered its 2012 S&P 500 earnings estimates to $103.50, from $105.00, and $110.00 in 2013, from $113.00.
There are 4 key reasons behind this change in estimates:
- Weaker U.S. economic data – Incoming economic data has missed estimates, most recently the Philly Fed, consumer confidence and initial jobless claims have disappointed. And this is “bleeding into expectations for corporate profits, in the U.S. and abroad”.
- Slower growth abroad – Foreign exposure is weighing on corporate results which is important since a third of the S&P 500’s earnings come from abroad.
- Strengthening dollar – Given the weaker growth abroad and concerns around the stability of the euro, the dollar has strengthened 5 per cent since the start of the second quarter. The euro is expected to fall to 1.15 against the USD by the end of the year.
- Financial sector earnings – CDS spreads for the largest financial institutions had widened even before JP Morgan announced its London Whale loss, showing a more challenging trading environment for U.S. investment banks.
But Golub says the most important thing to note is that price multiples (which investors use to gauge how attractive a stock it) are expected to be flat for the rest of the year.