We think the S&P 500 is likely to remain range-bound between 1020 and 1130.

The S&P 500 reversed July s strong gains in August, as downbeat macroeconomic news on jobs, housing, and the consumer offset waning earnings euphoria. This resulted in a volatile trading environment that was exacerbated by low summer volume. Despite recent weak employment, housing, and consumer data, we believe the equity market s recent declines and reduced economic expectations have largely discounted these economic concerns.
Additionally, global manufacturing data released recently suggests to us that the modest global economic recovery remains intact, and that investors are likely to have greater confidence in second-half earnings forecasts. Moreover, reasonable valuations as well as increasingly attractive dividend yields (relative to bond yields) should support U.S. equities across size and style categories.
On September 1, S&P s Investment Policy Committee raised its 12-month projected target price for the S&P 500 to 1200 from 1190, implying an 11.1% advance from that day s closing level, and increased its exposure to U.S. equities in its recommended asset allocation (see page 7 for more). While we believe U.S. economic data remains too erratic to warrant an overweight stance, we believe a neutral posture is now appropriate.
At the sector level, our overweight sector recommendations, consumer staples and information technology, reflect an emphasis on what we view as dependable global growth at a reasonable price. Conversely, we recommend underweighting more domestic, consumer and housing exposed sectors with limited earnings visibility, such as financials, consumer discretionary, and materials.
Alec Young

Equity Strategist

03-Sep-2010 17:00:24 (15825931)   Copyright 2010 The McGraw-Hill Companies, Inc, Standard & Poor's, a division of The McGraw-Hill Companies, Inc., and their affiliates (collectively, "S&P"). Reproduction of this content in any form is prohibited except with the prior written permission of S&P.