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US Stocks Cannot Ignore Global Problems Forever: Strategist

Back in September, before the scale of the euro zone debt crisis became apparent, the IMF’s World Economic Outlook predicted the world’s developing economies would grow by 6 percent in 2012 versus just 2 percent in the developed world.

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Since then, the prospects for Europe have been hit by the debt crisis while analysts have become a little more confident on the prospects for the US. The big question is whether this will be the case if the euro zone debt crisis becomes a fully-fledged financial crisis.

“The year 2011 ends with a pattern of diverging growth among major economies, and we expect this de-synchronization to persist in 2012” said Neal Soss, the chief economist at Credit Suisse in New York said in a report on Thursday.

A mild euro zone recession would not, in Soss’ opinion, be enough to drag growth in the rest of the world sharply lower; but he believes a severe downturn, driven by a financial crisis, could “still overwhelm the rest of the world.”

Growth may show big divergences on a global basis but stocks are unlikely to do so forever, according to Barclays Capital.

“Decoupling talk is back in vogue. We are disinclined to believe that markets can truly diverge in the event of a European credit contraction; however, there is little doubt that U.S. economic data have supported U.S. markets and frustrated traders expecting another shoe to drop,” Barry Knapp, the chief market strategist at Barclays Capital said on Thursday in a research note.

US stocks have managed to make healthy gains since the beginning of October with the S&P 500 outperforming other indices in Europe and the developing world . With estimates for earnings growth in the US holding up, Knapp believes it will not be the performance of the domestic economy that poses a risk to stocks.

“The obvious risk to the global growth outlook and S&P 500 earnings is the trend in European GDP forecastsand its effect on global estimates," Knapp wrote.

"Next week brings the flash November PMI estimates for Germany, France and the euro zone, which could certainly trigger another round of cuts in estimates for global growth-leveraged sectors such as industrials, technology and energy,” said Knapp, who believes US stocks could finish the year strongly, before hitting headwinds in the first quarter of 2012.

“Further out, we are not as sanguine and expect a tough stretch for U.S. equitiesbeginning in Q1 2012. Global growth worries should remain on the forefront, and public policy concerns heading into election season should put upward pressure on equity risk premiums,” he wrote.

“Until then, we see symmetrical risks for U.S. equities, with a bias to the upside,” Knapp added.

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