National Bank Financial is cutting its stock market targets and equity allocation recommendation in view of the weakening U.S. recovery.

In a research note, NBF says, “We continue to think that economic recovery is on track in most of the developed world and that emerging Asia will continue to expand robustly. On the other hand, recent U.S. developments cannot be ignored. Though we trace much of the expected Q3 slowdown in U.S. domestic demand to the unwinding of temporary stimulus, the recovery remains fragile.”

NBF says that U.S. fiscal policy is a key source of uncertainty. It notes that tax cuts enacted by the previous administration are due to expire at the end of the year, and it’s not clear whether they may be extended. “Unfortunately, political dithering in Washington and the resulting lack of clear guidance to investors on this issue means that the road to recovery is now fogged over — all the more so in that this fall’s midterm elections could provide a platform for protectionist rhetoric,” it says, adding that this is not good for stocks or bonds.

While it still believes that equity markets are likely to move higher in the coming months, NBF now says that the risk-reward outlook no longer warrants an overweight stance. “Until some of the political dust settles, we are raising the cash portion of our model portfolio to 10% and reducing our equity exposure to a neutral 55%,” it says.

At the same time it is also revising its year-end index targets downward. It now calls for the S&P/TSX to finish the year at 12,100, down from its prior call of 12,700. And it cut its forecast for the S&P 500 to 1120 from 1280. “These downgrades follow from our downward revision of real GDP growth and profits for Q3 and Q4,” it says adding that for the U.S. index it has also reduced the projected earnings multiple.

IE