Credit Suisse: End of QE2 bearish for stocks

The Standard & Poor's 500, the US stock market's benchmark index, could fall roughly 10% from its current level, partly due to the upcoming end of the Federal Reserve's bond-buying program, Credit Suisse's US equity strategist said on Wednesday.

Doug Cliggott, of Credit Suisse, told the Reuters 2011 Investment Outlook Summit in New York that although the completion of the Fed's second round of bond buying at the end of June has been well telegraphed, its impact has not been fully reflected in the stock market.

"We are of the opinion it is still a big deal," Cliggott said. "We would think an index between 1,170 and 1,200 would be a realistic estimate of where we might be headed."

The S&P 500 on Wednesday afternoon was trading at 1,282 points, down about 0.2% for the day, and down 5.9% since its May high.

Credit Suisse's year-end target for the S&P 500 is 1,275.

The Fed, under its second round of quantitative easing, known as QE2, is buying a total of USD 600 billion in government bonds, a move that has added a huge amount of liquidity to the market, helping to drive up stock prices.

Cliggott noted that the stock market dropped last year between the end of the Fed's first round of quantitative easing and its announcement of QE2.

Weaker-than-expected US economic data, particularly slow job growth and worries about the euro zone debt crisis also have contributed to the market's recent weak performance.

Credit Suisse forecasts 2011 earnings per share for the S&P 500 of USD 94, rising to USD 95 in 2012, which is below the current Wall Street consensus. Corporate profits for the current cycle could peak in mid-2012, he said.

The Thomson Reuters consensus forecast for 2011 earnings per share for the index is USD 100.07, and for 2012 it is USD 113.43.

"We could get to USD 100 (per share), but you need either private sector credit creation or better private sector employment growth, some demand generators to kick in that frankly aren't running at very high velocity right now," Cliggott said.

By contrast, 2012 earnings could fall "if we get a significant amount of fiscal tightening," he said. If federal spending were to fall in 2012 versus this year, there would be a "significant" possibility of a recession.

Other speakers at the Reuters 2011 Investment Outlook Summit have been more upbeat.

Citigroup Chief US Equity Strategist Tobias Levkovich forecast earnings per share for the S&P 500 at USD 98 for 2011 and USD 105 for 2012. Goldman Sachs' EPS forecasts are USD 96 and USD 104, respectively.

Among sectors, Credit Suisse is currently underweight financials and consumer discretionaries, while it is overweight health care and other defensive sectors.

"Our theme has been low beta, relatively stable earnings streams, with preferably decent dividend yield," Cliggott said.

Credit Suisse is most heavily underweight financials, a sector which has been underperforming the S&P 500. The S&P financial index is down 9.1% since May 2.

The firm is also recommending a 10% cash position.

"We are always hunting for what are perceived to be attractive valuations, and improving or steadily improving industry fundamentals," Cliggott said. "And they are hard to come by in the US marketplace at the moment."