NEW YORK ( TheStreet) -- Enjoy the spotlight while you can fiscal cliff because talk of the need for a grand bargain on Capitol Hill is already leaping into Wall Street's lexicon. Most market observers expect the Democrats and Republicans will show they learned their lesson about playing chicken with the nation's finances during the debt ceiling debacle and come to some compromise in a timely manner in order to avoid the fiscal cliff, which refers to a bevy of tax increases and spending cuts that will go into effect on Jan. 1 unless the parties can hammer out a deal. There is a fear though that U.S. legislators will simply borrow a page from their procastinating counterparts across the pond and find a way to delay, rather than solve, the country's financial problems. What's needed instead is a ... wait for it ... grand bargain that will be more than a band-aid. UBS used the term in commentary on Monday as it introduced a year-end 2013 target of 1425 for the S&P 500. That view implies potential upside of just 2.7%, or 38 points, from Monday's close at 1387, and 4.8%, or 65 points, from Friday's finish at 1360. "Our cautious stance is predicated upon a belief that a number of macro uncertainties -- the most important of which stem from long-term U.S. fiscal imbalances --will hamper earnings growth and constrain valuations in 2013," the firm said. "While not our base case, we believe that stocks could rise substantially if U.S. policymakers can negotiate a 'grand bargain' that credibly addresses long-term tax, spending, and entitlement reforms. Unfortunately, our sense is that the most important structural issues will be pushed off into the future, leaving significant uncertainty about the long-term direction of the economy and corporate profits." UBS reset its year-end 2012 target for the S&P 500 at 1375 and said it expects "mid-single digit earnings growth over the next two years on the back of moderate economic growth, flattish margins, and buyback activity." From a sector standpoint, the firm said it's now overweight on discretionary, Staples and Health Care, and that it's staying underweight on financials, telecom and utilities, stating that: "We believe stocks exhibiting a combination of high earnings growth and payout ratios will continue to outperform."
One observation that UBS offered up was that while the S&P 500 has doubled off its financial crisis low in March 2009, the forward price-to-earnings ratio that the index has been afforded has actually contracted, going from a peak of more than 15x early in the recovery to a multiple of 12x right now, a decline of roughly 20%. "In our view, stock investors have been unwilling to 'pay up' for earnings results due to an exceptionally high level of uncertainty about the future direction of the economy and corporate profits," the firm said. Since the uncertainty is as thick as ever right now -- Monday's rally aside -- investors may want to see more evidence that a grand bargain might be in offing before ponying up. As for Tuesday's scheduled news, the holiday-shortened trading week will still see its share of high-profile earnings reports. Best Buy's ( BBY) numbers are slated to hit the tape in the a.m. and Wall Street is looking for third-quarter earnings of 12 cents a share from the Minneapolis-based consumer electronics retailer on revenue of $10.73 billion. All the back-and-forth about a potential buyout by Best Buy founder Richard Schulze hasn't translated to any appreciation in the stock, which is down more than 40% so far this year, hitting a 52-week low of $13.52 on Friday. The company, which enacted significant layoffs over the summer, continues to struggle to shake its rep as "Amazon's showroom." Most recently Best Buy announced a management shake-up and warned of weak results for the third quarter in late October so expectations are pretty low headed into the print. UBS, which has a neutral rating on the stock, lowered its 12-month price target to $14.50 from $16.75 on Monday. "A lot of the mystery has been taken out of BBY's 3Q given its preannouncement and recent investor meeting," the firm said. "The focus will be on how the company is positioned for the holidays and recent trends. We are forecasting a -2% domestic comp and -85 bps of domestic GM
gross margin erosion in 4Q, but a wide range of outcomes is possible, especially with BBY's new price match policy in place."
UBS said it's expecting Best Buy to promote a smaller assortment of products on Black Friday this year but with higher discounts. "Our detailed analysis of BBY's Black Friday shows that across Computers, HDTVs, Cameras and Appliances company reduced the number of featured products from 143 items last year to 61 items this year," the firm said. "However, the discounts are greater this year. Interestingly, only 3 HDTVs are discounted vs. 29 last year. As a reminder, BBY's domestic GM declined by 40 bps during last year's 4Q due to promotional small and mid-sized TVs increasing as a mix of sales." UBS expects trading in Best Buy shares to be choppy until the market gets more clarity about whether Schulze will be able to attract investor support for his go-private bid and how the holiday season is shaping up. "The volatility is likely to persist, but it appears the shares are approaching a near-term floor," the firm said. "Our new $14.50 PT equates to 5x our CY'13E EPS (based on DCF/multiple blend)." The other big morning report is Dow component Hewlett-Packard ( HPQ), which is reporting its fiscal fourth-quarter results. The average estimate of analysts polled by Thomson Reuters is for a profit of $1.14 a share in the October-ended period on revenue of $30.43 billion. Last week's poor numbers from Dell ( DELL) prompted a fresh exodus out of HP shares, which are now down more than 48% year-to-date. The Dow component's problems are well known as CEO Meg Whitman has found been gamely trying to reorganize the top PC maker just as the macro environment has turned sour. Sterne Agee has a neutral rating on the stock, and the firm is projecting the top line could be a bit light. "Based on our supply chain work, we anticipate light revenue but a meet or beat on EPS due to cost controls," the firm said. "For its outlook, we anticipate the company to reiterate its recently lowered guidance range of $3.40-$3.60 in EPS for FY13 vs. consensus at $3.52. With DELL, INTC, and MSFT giving disappointing comments on PC demand, investor expectations are fairly low." The majority of the sell side is on board with Sterne Agee's skepticism as 27 of the 33 analysts covering HP are at either hold (19), underperform (6) or sell (2). Check out TheStreet's quote page for Hewlett-Packard for year-to-date share performance, analyst ratings, earnings estimates and much more.
Other companies slated to report on Tuesday include American Woodwork ( AMWD), Campbell Soup ( CPB), Chico's FAS ( CHS), DSW Inc. ( DSW), Eaton Vance ( EV), Fred's ( FRED), Genesco ( GCO), H.J. Heinz ( HNZ), Hormel Foods ( HRL), Medtronic ( MDT), Salesforce.com ( CRM), School Specialty ( SCHS), Tech Data ( TECD), Valspar ( VAL), and Zale Corp. ( ZLC). Tuesday's economic calendar includes housing starts and building permits for October at 8:30 a.m. ET. The consensus estimates are at 840,000 and 870,000 respectively, according to Briefing.com. And finally, Monday's after-hours session featured a move higher by beaten-down deals company Groupon ( GRPN), which gained ground after hedge fund Tiger Global Management disclosed a stake of 65 million class A shares in the company. That represents 9.9% of Groupon's outstanding class A stock, according to Reuters. Groupon shares, which priced at $20 each in the company's initial public offering last November, were last quoted at $3.20, up 3.1%, on extended volume of more than 150,000, according to Nasdaq.com. Also making headlines late was Dow component JPMorgan Chase ( JPM), which named Marianne Lake as its next chief financial officer, succeeding Doug Braunstein, who is becoming the bank's vice chairman. Lake, currently the CFO of the company's consumer and community banking business, is expected to transition into the CFO role during the first quarter of 2013, JPMorgan said. -- Written by Michael Baron in New York. >To contact the writer of this article, click here: Michael Baron.