TD Waterhouse's U.S. Equity Analyst, Ryan Lewenza, has just released his team's latest outlook for U.S. equities, titled, "Three Supports for a Higher Equity Market."
Here are the highlights from the report. The entire contents follow in the slidedeck below (fullscreen for the better read, or download):
· The recovery in the U.S. stock market since the March 2009 lows has been driven by three key supports: 1) liquidity injections by global central banks, 2) improving economic momentum, and 3) strong corporate profits. In our opinion, we are currently hitting on 2.5 of those 3 supports, which is why we see the potential for further upside in H1/12. While the technical backdrop and high level of investor complacency lead us to believe a short-term pause/pullback is likely, we continue to recommend investors “buy on the dips.”
· The European Central Bank (ECB) initiated a lending program in December 2011 to European banks that were facing an escalating credit crunch. The program, called the Long-term Refinancing Operation (LTRO), involved issuing €489 billion in 3-year loans to European Banks to: 1) help them address their short term liquidity needs, and 2) engender European banks to purchase sovereign bonds, in an effort to help drive sovereign bond yields lower. The LTRO program is expected to be expanded later this month, with another €1 trillion expected to be issued to European banks. As history has clearly shown, when central banks are injecting liquidity into the system, risky assets tend to benefit, which is one important reason we remain constructive on equities in the coming months.
· The second support is the ongoing economic reacceleration in the U.S. and global economy. In the U.S., the data continues to come in above expectations, with the probability of a U.S. recession declining materially in recent months. Obviously, the key question is whether the positive momentum will continue, especially since we saw similar strength in the H1/11, which then reversed in the second half of year. For now the data remains supportive, and another factor behind our more constructive outlook for H1/12.
· Finally, as we have outlined at length in past reports, U.S corporate profits have never been stronger, helping provide an important support to equities.
U.S. Equity Strategy (Three Supports for a Higher Equity Market) - February 10, 2012
