S&P 500 will finish lower, but fundamentals are still fine

fortuneteller_410Russell Investments has lowered its year-end forecast for the S&P 500 from 1372 to 1300 due to the weaker economic environment and increased uncertainty regarding fiscal policy and sovereign debt in the US and Europe.

However, Erik Ristuben, CIO at the firm, believes that the current equity market level – and particularly the lows of last week – is based on the market pricing in a heightened probability of the US slipping into recession in the near future.

Yet Ristuben says stock fundamentals are solid, and current corporate earnings and balance sheets are strong. Russell expects the economic data to stabilise in the third quarter and modestly improve in the fourth quarter, meaning that the stock market will rally as the recession scenario fades in likelihood.

Despite this, the US and Europe face significant policy issues and the market’s concern over the potential outcomes of these is acting as a drag on stock market multiples. This is the primary reason that Russell is lowering its end-of-year forecast.

In a note to investors out today, Ristuben, said: “Investors should note that stocks currently face an unusually wide range of year-end market outcomes. If recent market and consumer sentiment prove to be too much of a hurdle for the currently struggling economy to overcome, the chance of recession is not insignificant.”

He added: “If policy errors occur, then quite negative market results could be expected. On the other hand, if policy makers continue to make slow and painful progress on the issues of the day, and economic growth rates begin to improve, stock prices could rally considerably.”

All eyes will be on Europe tomorrow and the outcome of the meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy, he said. The leaders will meet to discuss Europe’s ongoing debt crisis.

©2011 funds europe