Yield & Income - Third Quarter Outlook:
UBS in its Yield & Income Outlook for the third quarter, in a report dated July 26 states:
Bond yields biased higher:
Expectations for an additional 75 basis points of Fed tightening this year, sustained GDP growth, and moderately higher inflation risk will likely push longer-term bond yields materially higher by year-end. The UBS economics group continues to forecast 10-year treasury note yields to rise to 5% by year-end from current levels of 4.25%.
Modest upside for equities:
Although expectations for continued economic growth should support equity markets, the outlook for increased inflation and a slowdown in corporate earnings growth presents a risk to performance in the near term. Currently, we view stocks to be fairly valued and estimate a 2005 year-end fair value range for the S&P 500 of 1230-1280, implying 1-5% upside from current levels.
Sector outlooks:
"Dividend ruler" stocks offer attractive yields, solid fundamentals, and the potential for dividend growth. Near-term market momentum may lead to higher REIT valuations. We prefer MLPs that have the ability to raise their distribution payout. Tax-advantaged and floating-rate preferreds remain viable strategies, and high-yield closed-end funds may experience dividend reductions in 2005.
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