TD Waterhouse's, Senior U.S. Equity Analyst, Ryan Lewenza, has just released their latest U.S. Equity Strategy Quarterly (Q3/11) Update report.
Highlights include:
· The equity markets performed poorly in Q3 as risky assets came under pressure due to an escalation of the Eurozone sovereign-debt problems and mounting concerns over a potential U.S. recession.
· The U.S. economy is facing numerous challenges, however it’s our view that the European sovereign debt issues remain the largest risk to the global economy and stock markets.
· Some interesting proposals to solve the European debt problem have been discussed recently, including increasing the European Financial Stability Facility (EFSF) from its current €440 billion to potentially €2 trillion and/or possibly implementing a European equivalent to the Troubled Asset Relief Program (TARP), by injecting billions into European banks. It is encouraging to see lawmakers becoming more focused on these issues, however we remain skeptical of a long-term successful solution.
· Much has changed in the last quarter, with the U.S. equity market discounting slower economic growth and possible contagion effects from Europe. As a result, we are lowering our year-end price target for the S&P 500 to 1,250 from 1,365 previously.
· From a longer term perspective we view current market valuations as attractive with the S&P 500 trading at 11.7x 12-month trailing earnings.
· With the S&P 500 in a confirmed downtrend and trading below its key 50 and 200-day moving averages, we continue to maintain a cautious near-term technical view of the U.S. stock market.
· While we believe the S&P 500 is susceptible to additional near-term pressure, we emphasize that seasonality is about to improve dramatically for the North American equity markets. With the markets coming under pressure recently, and positive seasonality fast approaching, we believe there is a good chance for a year-end rally.
· With odds of a U.S. recession increasing, we are further reducing portfolio risk by increasing utilities and telecom to overweight. With the upgrades, our overweight sectors are information technology, health care, utilities and telecommunications. We’ve lowered our energy weight from overweight to market weight. Financials, materials, and consumer discretionary remain underweight. Consumer staples and industrials remain at market weight.
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