All good things must come to an end, including the dream run in U.S. equities, according to HSBC, which has downgraded its view on the country's stocks to underweight from neutral.
"Global equities initially shrugged off the start of Fed [Federal Reserve] tapering. But, as the Fed continues to cut asset purchases this year and markets start to anticipate the first rate rise in 2015, we think this will present a headwind for equities, particularly in the U.S.," Garry Evans, global head of equity strategy at HSBC wrote in a report on Wednesday.
According to the bank's forecasts, the S&P 500 will rise just 4 percent to 1,900 in 2014, following gains of 30 percent in the previous year.
A trader works on the floor of the New York Stock Exchange.Getty Images
"With earnings key, we favor countries and sectors with the greatest potential for upside surprises. So we cut the U.S. to underweight because earnings are near record highs, valuations look stretched relative to the rest of the world, and the Fed is moving towards ending monetary easing more quickly than other developed-market central banks," Evans said.
While he doesn't expect U.S. earnings to fall from here, Evans says there are signs of a slowdown in earnings momentum – a contrast to Europe where earnings are likely to see a strong rebound from depressed levels. The bank is overweight Europe equities, forecasting 14 percent upside for the FTSE Eurofirst 300 index this year.
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"And it is a similar story on monetary policy," said Evans. "Whilst the policy environment remains attractive in absolute terms, the direction of change is negative relative to other regions. Whilst the Fed has now begun to scale back its extraordinary measures, there is scope for the ECB [European Central Bank] to loosen policy further given the on-going disinflationary pressure in the euro zone," he said.