Friday, July 2, 2010

US Equity strategy --the greatest remains the sovereign issues

NEW YORK - MARCH 17: People stand inside the o...


· US Equity strategy - The severity and duration of this equity market correction (10 weeks and 16% from highs), coupled with continued stresses in Europe, have contributed to a negative feedback loop to the US economy.  On 7/1, J.P. Morgan Economists lowered their 2Q/3Q GDP forecasts to 3.2/3.0% (from 4.0/4.0%).  Our earnings ests are achievable ($81 for ’10 and $90 for ’11) even w/new lowered ests (but upside absent unless GDP accelerates).  Currently, the 30/10Y is 97bp, one of the steepest, and likely would be inverted if a recession is seen. Historically, it has inverted 17 months prior to recessions; thus, we see little risk of a double-dip.  Since failing at the 200-day moving average, the S&P 500 has sunk 8% and remains severely oversold. While there are multiple headwinds, the greatest remains the sovereign issues. We still see several reality checks/catalysts in coming weeks, including the June payrolls report, the European stress tests (mid-July) assuming markets accept them as realistic, and 2Q earnings season. 

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