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Risks are tempering stock investors' enthusiasm

May 30, 2011|Reuters

The world looks a lot more dangerous than it did only a few months ago, and there are signs that U.S. stock investors are starting to demand more for the added risk.

With important manufacturing and jobs data due this week, it could get even riskier. That means nervous investors are likely to keep a lid on equity prices this year as they grapple with slowing global growth and a host of geopolitical issues, such as unrest in the Middle East and North Africa and debt defaults in the euro zone.

The actions of some big Wall Street banks show the shift in the risk-reward nexus. Over the last two weeks, UBS, Citigroup and Goldman Sachs have in effect lowered their view of what investors will be willing to pay for a dollar of corporate earnings this year.

Jonathan Golub, chief U.S. equity strategist at UBS in New York, kept his target for the Standard & Poor's 500 index on hold even though he increased his expectations of what S&P 500 companies would earn this year and next.

"Earnings are going to continue to surprise to the upside, but investors will continue to be reluctant to believe in the sustainability of earnings and, therefore, not give full credit to that," Golub said.

Golub argues that a batch of economic data pointing to slowing manufacturing, a weak housing market and stubbornly high unemployment is weighing on investor sentiment.

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