Global headwinds, Fed to keep U.S. stock gains modest this year

By Caroline Valetkevitch NEW YORK (Reuters) - Global tensions and reduced stimulus from the Federal Reserve will keep U.S. stock market gains modest for the rest of 2014, a Reuters poll found. After last year's 30-percent rally in the benchmark S&P 500, many investors have been anticipating a pullback in prices, especially with profit growth well off the peaks of this earnings cycle. Despite that, pullbacks in U.S. stocks have been modest and quickly pounced upon by buyers. The S&P 500 is expected to rise to 1,950 by year end, according to a median forecast from 33 strategists polled in the past week. This would represent an increase of 5.5 percent from the end of 2013 and a gain of 4.8 percent from Wednesday's close. It would be the smallest yearly gain for the index since 2011, when the S&P 500 ended virtually flat. "We're in a little bit of a negative risk-reward dynamic for equities," said Barry Knapp, managing director of equity research at Barclays Capital in New York. But "typically when the Fed reaches this point where they begin normalizing policy, it's never been terminal for the bull market advance, and so we think ultimately we'll resume an uptrend. But that'll likely be later in the year." The Fed announced in December it would begin scaling back its bond-buying program, which had been a key driver for the market's advance. It said on Wednesday, after the poll was completed, it would probably end its bond buying program this fall and interest rates could rise in the first half of 2015. Tensions in Ukraine and a slowdown in China's economic growth have added to worries for stocks this year. However, the poll's year-end 2014 S&P 500 target is up from a forecast of 1,925 in a December Reuters poll, taken before the Fed announced its changes to the stimulus program. By mid-year, the S&P 500 is expected to have risen just 2.5 percent from the end of 2013. The Dow Jones industrial average is expected to end 2014 at 17,300, up 4.4 percent from 2013. LUKEWARM ECONOMIC DATA Mixed economic data, including Tuesday's housing starts which fell for a third straight month, has raised worries the Fed may have pulled back on its stimulus too early. Still, many economists and also the Fed's new chair, Janet Yellen, have said unusually harsh winter weather appears to have been behind some of the recent weak data. Also, Commerce Department data showed the world's biggest economy expanded at a decent 2.4 percent rate in the fourth quarter. Any tailwinds could help cushion some investors' worries about equity valuations, which are at their highest since 2008. Profit growth is forecast at 8.7 percent for 2014, up just slightly from 2013's growth of 6.2 percent, data showed, and some strategists say that should be enough to underpin prices. "The right way to characterize the market is not that it's cheap, but that it's reasonably priced, and we do see a little bit of upside to valuation for the rest of the year (with) most of the returns coming from earnings growth," said Dan Suzuki, U.S. equity strategist at Bank of America Merrill Lynch in New York. The S&P 500's forward four-quarter price-to-earnings ratio is now at about 15.5, compared with 13.1 at the start of 2013, according to Thomson Reuters data. Still, many strategists in the poll rated developed markets as more expensive than emerging markets. "Emerging markets are cheaper than developed markets, but there is a lot more risk," said Phil Orlando, chief equity strategist at Federated Investors in New York. (Additional reporting by Rodrigo Campos, Ryan Vlastelica, Chuck Mikolajczak and Angela Moon; additional polling by Hari Kishan and Swati Chaturvedi; Editing by Chizu Nomiyama)