The US stock market’s lukewarm reaction to yesterday’s FOMC statement suggests the scale and timing of the Fed’s additional monetary stimulus have been largely, though not completely, discounted. We doubt the rally in equities will last much longer given the limited boost that QE2 is likely to provide to growth; a probable squeeze on profit margins; and the fact that valuations are stretched. Our forecast is for the S&P 500 to creep a little higher to 1250 by the end of this year, but to then fall back to 1100 or so by end-2011.
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