Standard & Poor’s Investment Policy Committee reiterated its recommended model asset allocation of 65% stocks, 20% bonds, and 15% cash in its 2006 outlook.

Within the stock allocation portion, S&P advises that 20% be allocated toward non-U.S. equities. The IPC also established a year-end S&P 500 Index target of 1,360, which implies an approximate 9% total return (including dividends) from S&P’s year-end 2005 forecast of 1,270.

S&P’s chief investment strategist, Sam Stovall, has a positive outlook for 2006, saying, “the increasing likelihood that Federal Reserve monetary policy tightening will end as a result of continued strong productivity growth and low core inflation will likely generate a positive macro economic environment for equities. As a consequence, S&P equity research analysts project earnings to benefit from solid economic underpinnings, with a projected 11% gain in 2006, a record level.”

Favorable valuations are an important factor in S&P’s positive outlook, with Stovall adding that, “Valuations remain attractive, particularly with the S&P 500 Index trading at a P/E of 16x, based on estimated 2005 operating EPS. This represents a discount to the long-term average over the 1988-2004 time frame of approximately 20x forecasted operating results.”

Coincident with the new IPC forecast, Stovall raised his recommended portfolio allocation stance on the U.S. financials sector to “overweight” from “market weight”. “Concerns over the impact on higher interest rates on most major industries within the U.S. financials sector are already reflected in their low valuations,” said Stovall. “In addition, S&P Equity Research believes investors have begun to gravitate towards stocks with high S&P Quality Ranks, which are characterized as those companies with long established records of earnings and dividend growth and stability. U.S. sectors with high concentrations of such stocks should perform best, and they are currently reflective of the financials, health care and consumer staples sectors.”

Outside the United States, S&P remains positive on Japan but has grown cautious on Europe. S&P equity market strategist, Alec Young, reiterated his positive sentiment on Japan’s equity market, reflecting a positive view on earnings momentum stemming from increased corporate pricing power, corporate restructuring and improving domestic demand as deflation comes to an end. “Exporters of information technology and industrial goods to the U.S. and China should continue to benefit from a weak yen, as interest rate spreads continue to favor the dollar,” according to Young.

In Europe, according to S&P European equity market strategist, Clive McDonnell, “tighter monetary policy in the UK, the continent, and in key export markets like Japan and the U.S., coupled with slower 2006 EPS growth and stretched valuations in cyclical sectors, justify a more defensive stance.” Reflecting S&P’s more defensive stance, S&P is recommending an “overweight” stance on the non-cyclical consumer staples and health care sectors in Europe.