Wall St correction likely due to Fed exit: Barclays

NEW YORK (BestGrowthStock) – U.S. stocks (Read more about the stock market today. ) are likely to suffer a correction in the second quarter as anxiety about the Federal Reserve’s exit strategy sparks caution, Barclays Capital said on Thursday.

“Uncertainty around the implications of policy normalization is likely to be the catalyst for a correction in global bond markets, which should prompt a correction in equities in the second quarter,” Barclays Capital said in its latest Global Outlook.

“We maintain a cautious equity stance in both the United States and Europe. Looking further out to the end of this year, however, we maintain a more constructive view.”

Writing in their equity outlook, Barclays Capital analysts Barry Knapp and Edmund Shing said it was unlikely that the period of adjustment that sparked a sell-off in mid-January was complete.

U.S. stocks (Read more about the stock market today. ) have bounced back, and the Dow Jones industrial average (.DJI: ) and the Standard & Poor’s 500 (.SPX: ) this week hit 17-month highs.

“The complexity of the Fed’s exit strategy and the lack of the usual bear flattening in the Treasury market together make it unlikely that the period of adjustment is complete,” Barclays said.

Even so, the correction will be a buying opportunity.

Barclays Capital said it has set a year-end target of 1,210 for the S&P 500 (.SPX: ), with an implied total return of 11percent in 2010, up from its initial target of 1,120. The S&P on Thursday closed at 1,165.83 points.

“We would treat any major pullback in share prices as a buying opportunity. We favor defensive over cyclical sectors because of a turn in leading indicators, a reversal of analyst earnings estimate revisions, and compelling valuations.”

Commenting on earnings, the analysts said “while we are becoming somewhat more optimistic about corporate earnings, we still believe that consensus is too high and our favorite measure of earnings growth momentum, net revisions, is rolling over at a high level.”

Significant impediments to higher share prices in the second quarter could also come from the combination of stalling earnings estimate revisions and a higher discount rate on those earnings, Barclays Capital said.

Other headwinds should be the March employment report in early April, the second-quarter earnings season in mid to late April, and the Federal Reserve’s next policy meeting in late April.

“If the correction develops for the reasons we delineate, an improving growth outlook leading to higher rates, we would use any pullback to the 1,000-1,050 range on the S&P 500 to aggressively add to U.S. equity exposure.”

A mid-point of that range is 1,025, which implies a “text book” correction of 10 percent or more from the S&P 500’s current level of 1,165.

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(Reporting by Ellis Mnyandu; Editing by Leslie Adler)

Wall St correction likely due to Fed exit: Barclays