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What bubble? We are still buying US stocks: UBS

Spencer Platt | Getty Images News | Getty Images

While many analysts fear that quantitative easing is blowing a bubble in U.S. stocks, UBS is increasing its allocation, citing earnings expectations.

"While there are some concerns, ultimately, long-term investors should only care whether sentiment has pushed valuations beyond reasonable levels," said Alexander Friedman, the global chief investment officer for UBS wealth management, in a note. "In short, it has not: investors need not fear that we are in the midst of a dangerous bubble in risk assets."

While share valuations based on price-to-earnings ratios and cyclically adjusted earnings yields have risen to fair to slightly high levels, earnings growth may drive price appreciation, he said. But Friedman added, investors shouldn't expect a repeat of the more than 15 percent annualized returns seen over the last five years, with annual returns of 7-8 percent more likely.

(Read more: Stocks 'very overpriced,' and so what if they are?)

UBS is overweight on both U.S. and European equities, raising allocations for both amid accelerating global growth and supportive central banks.

"Global growth is expected to be higher in 2014 than 2013 – the first annual acceleration since 2010 – which we expect to provide support for global equities," he said.

"U.S. company earnings are expected to grow by 8 percent in 2014, driven by solid domestic demand. In the euro zone, earnings are showing tentative signs of a turnaround and we expect them to grow at a low double-digit rate in 2014, supported by improving economic growth and expansionary monetary policy."

(Read more: Dow is way overvalued: Time to question this rally)

But UBS is lowering its allocation to Japanese equities. "We expect Japanese equities to perform broadly in line with global equities, and believe that playing Japan via an underweight in the yen offers a better risk return," Friedman said.

Not everyone is sanguine on the outlook for U.S. equities.

While indications the U.S. Federal Reserve isn't likely to taper its asset purchases before March are positive for risk-taking, "without a return of trend growth, the major markets in the developed world are essentially re-rating equity markets without any increase in earnings potential that would justify such a strategy," said asset manager Coutts in a note.

Coutts, which has around $49 billion under management, prefers European over U.S. equities as Europe's recovery is only getting started and the continent's stocks are cheaper.

(Read more: Five warning signs that stocks could be getting too bubbly)

Jefferies is also a bit cautious on U.S. equities, expecting the S&P 500 index will only rise modestly ahead, setting a 1950 target for the end of 2014, compared with the current level around 1800.

"U.S. equities have been accelerating on the back of an increase in margin debt and fund inflows which have led to the price-to-earnings multiple expanding," it noted.

It expects further gains may be limited, with companies likely to begin raising "cheap equity" if price-to-earnings multiples rise too fast.

(Read more: Good news: Bubble concern is at a 5-year high)

"Investors need to be mindful that a correction can easily unfold. We don't expect 2014 to be a smooth ride," it said.

"If earnings growth fails to keep step with the price change and if the economy were to suffer a bout of weakness, then we believe equities would experience a fairly sharp de-rating given how high expectations have been raised," it said.

To be sure, it is bullish on U.S. equities compared with its peers, expecting them to outperform emerging markets and trade in line with Europe. It sees "selective value," with domestic growth plays and small caps likely to outperform large caps and multinationals

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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