The mood is such that even a boost of a year-end S&P 500 target can have an almost begrudging feel to it. UBS lifted its outlook by 11% on Thursday to 1525 from 1375 but the commentary around the move was hardly gushing.
"While we're raising our year-end price target, we continue to believe that macro headwinds will hamper stock performance over the intermediate term," the firm said. "These include a coordinated global economic slowdown, weak earnings growth, potential negative side effects from unprecedented monetary easing, the fiscal cliff, uncertain election outcomes, the future of the Euro, and a burdensome regulatory environment. We believe the current market rally will continue until these issues grab headlines once again."
UBS thinks ultimately this round of quantitative easing is likely to play out the same way as previous programs."While central bankers' actions to avoid financial catastrophe have been very successful, efforts to spur economic growth have been far less effective," the firm wrote. "Looking at the market's responses to the extension of QE1, QE2, and Operation Twist, it's clear that stocks respond for a period of time, before rolling over when macro concerns move to the forefront and fundamentals ultimately lag elevated expectations. This has resulted in a "risk on, risk off" trading environment, primarily driven by multiple expansion and contraction, rather than a sustained improvement in underlying fundamentals." In the near-term, UBS is expecting a rotation into "the most volatile and economically-sensitive stocks" with outperformance from "early-cycle cyclicals, such as Energy, Materials, Autos, Homebuilders, and Diversified Financials" while non-cyclicals like consumer staples, health care, telecom and utilities lag. The firm also made the argument that so much bond buying by central banks can potentially hamper economic growth by adding to the macro fears that have stunted job creation. "For companies, additional Fed stimulus undoubtedly lowers borrowing costs and provides a temporary boost to stock prices," the firm said. "However, we believe the primary culprit holding companies back from hiring and making long-term investments is tremendous uncertainty around a number of macro issues, including large fiscal imbalances, interest rates, inflation, commodity prices, currency values, tax rates, and regulation. Arguably, an unprecedented increase in the size of central bank balance sheets creates even more uncertainty around these issues."