The Federal Reserve has set the stage for stock-market gains this year, according to Bank of America Merrill Lynch.
The central bank on Wednesday lowered its estimates of U.S. economic growth and outlook for interest rate hikes. That forecast means the Fed will keep trying to stimulate business activity with inexpensive capital for borrowing and investment.
“The Fed was dovish and consistent with 2015’s big surprise: easy global monetary policy,” Michael Hartnett, chief investment strategist at BofA, said in a March 18 report
obtained by Newsmax Finance. “The Fed was bullish for Wall Street. We expect equities to continue outperforming bonds and cash.”
The Fed’s estimates for lower interest rates would make its policy more consistent with central banks throughout the world. The European Central Bank and Bank of Japan have embarked on asset-buying programs in an effort to boost their ailing economies, and according to BofA, those policies are being priced into markets of developed countries.
“The diminishing ability of U.S., Japanese and European central banks to surprise markets with liquidity means investors are left to discount emerging market easing,” Hartnett said. Chinese Premier Li Keqiang’s “recent comment that China has plenty of ‘policy tools’ to address weaker growth and higher unemployment are sufficient to boost expectations of easing and Chinese yuan devaluation.”
The biggest concern for U.S. stocks is the expected decline in earnings for the next 12 months, he said. Profits of companies listed in the MSCI All Country World Index
are forecast to slide 6.7 percent this year.
“Equity gains will likely be restrained unless earnings per share accelerates,” according to BofA. “In our view, neither cash nor bonds offer viable alternatives to stocks in 2015 in the absence of recession.”
Hedge funds may start shifting money to Chinese stocks and away from European markets, which are getting overvalued, Hartnett said.
“The German DAX in local currency terms is currently 21 percent above its 200-day moving average, its most overbought reading since April 2000,” he said. “We recommend taking profits in Europe.”
Meanwhile, the Organization for Economic Cooperation and Development is warning that China's growth may slow more than expected if the government falters in enacting necessary structural overhauls.
According to Marketwatch
, the OECD said in its annual survey of China that the country needs an "unwavering commitment to structural reforms" and adherence to the rule of law to shift from its over-reliance on investment and manufacturing to consumption and services.
Barring unforeseen developments, Beijing's 7 percent economic growth target for 2015 is "sustainable and appropriate," said Ángel Gurria, secretary-general of the OECD.
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