US equities buyers should not bet on QE3 Having entered the thinly traded summer months, a new group of cheer leaders have emerged, motivated by ill tidings on the economy that could lead to further easing from the Federal Reserve: equity traders. The only problem is that the US economy is not weakening fast enough to warrant a prompt injection of liquidity in the form of more quantitative easing, or QE3. On Wall Street Such reliance on the Fed maintaining its liquidity punchbowl highlights just how dysfunctional markets remain four summers after the financial crisis erupted. It is a state of affairs that leaves investors with an almost impossible task of deciding where they should place their money ahead of a US presidential election, which will be followed by the uncertainty of politicians trying to resolve the "fiscal cliff" of automatic spending cuts and expiration of tax cuts. For now, equity traders must cool their hopes for QE3, and that may test the S&P's rebound that began in early June. Earlier this week, the S&P 500 touched a two-month peak, with the market having ignored signs of faltering global growth, worrying economic US data and the recent drumbeat of earnings warnings from big companies that has analysts forecasting the weakest quarterly profits growth since the recovery began in 2009. Capturing the current mood, Garry Evans, global head of equity strategy at HSBC, says: "We think it is wrong to be too bearish on equities: valuations are cheap, investors already ultra-gloomy and earnings still on track to grow this year." The rationale for such a view lies firmly with action by central bankers. "In particular, central banks offer likely support for equity markets: the Fed and European Central Bank will do more QE-type measures if things get much worse, though for now the data isn't bad enough to justify this," says Mr Evans. Fitting the bill was the news on Friday that the economy generated 80,000 jobs with unemployment remaining elevated at 8.2 per cent. While the June jobs number marks the third consecutive month of sub-100,000 job gains, the economy remains on track to expand about 1.5 per cent to 2 per cent for the second quarter. That's not weak enough to warrant the Fed following the Bank of England's move this week to fire up the printing press. Not helping the cause was the news that wage growth picked up in June. With inflation breakevens still higher than what was seen ahead of prior rounds of QE, it would seem the Fed is in no position to pull the trigger when it meets at the end of the month. The latest data duly pressured stock prices, but still left the S&P sitting on a gain of more than 7 per cent this year. For stocks, further selling pressure may loom as recent strength has been led by energy and financials. With the global and US economies slowing, such a performance is not warranted from these sectors, unless this is a market actively positioning for QE3. The timing of that move, if it occurs, has now shifted to September when a post-Fed meeting press conference is scheduled and central bankers have enjoyed their annual gathering at Jackson Hole. But the reliance on more monetary easing that is seen offsetting any fundamental bad news for equities does not find favour in all quarters. "It seems bizarre to regard poor economic data as such good news for equities and commodities in general," says Julian Jessop, economist at Capital Economics. While another round of QE may please traders and bullish Wall Street analysts with lofty year-end targets on the S&P, it may do little to shift investment flows that ultimately underpin any market. More than $500bn in domestic US mutual fund equity outflows have occurred since May 2007, according to the Investment Company Institute. If two prior rounds of QE couldn't stem the equity fund outflow, it's hard to see why a third round will. The problem for traders is that the prospect of QE3 is already acting to limit the downside for stocks. With the data not sufficiently weak, the only thing that will compel the Fed to act sooner is a pronounced drop in equities.