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U.S. Stocks Will Extend Rally on M&A, Weaker Dollar, UBS Says

U.S. stocks will continue last month’s rally through the end of the year as the dollar weakens, commodity prices rise and takeovers pick up, UBS AG said.

U.S. stocks rebounded in October from five months of declines, the longest streak since 2008, after European leaders persuaded bondholders to take 50 percent losses on Greek debt and boosted a rescue fund to 1 trillion euros ($1.4 trillion). The Standard & Poor’s 500 Index slid 14 percent in the third quarter, its worst quarter since the end of 2008. After closing within 1 percent of a bear market, or a 20 percent plunge from its high in April, the benchmark gauge climbed 11 percent last month.

“Against the backdrop of a debt crisis in Europe, a potential government default in the U.S. and the threat of recession worldwide, it’s no surprise that investors became highly risk averse during the third quarter,” Jonathan Golub, UBS’s New York-based chief market strategist, wrote in a report today. “The fourth quarter has started off on a decidedly different note.”

Stocks may continue to rise in the fourth quarter, led by companies with a larger share of revenue coming from outside the U.S. and by equities with greater volatility, Golub said. The gains will be fueled by an improved environment for corporate takeovers, a boost to profitability from the weakening dollar and higher commodity prices lifting energy and commodity producers, he wrote.

Dollar, Commodities

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against currencies of six U.S. trade partners, fell 3 percent in October, snapping two months of gains. The dollar fell against 15 of its 16 major peers during the month. The S&P GSCI Index of 24 commodities returned 9.8 percent in October, the most since May 2009, led by energy and metals. While the measure advanced to a six-week high on Oct. 27, it still hasn’t erased the 12 percent plunge in September.

“This should help to set up the S&P 500 for a strong finish heading into the end of the year,” the strategist said.

American companies are beating Wall Street profit estimates for the 11th straight quarter, enough to revive a bull market that analysts say will eclipse any rally in the past 12 years. Price forecasts for companies in the index from more than 10,000 estimates suggest the S&P 500 will advance 16 percent to 1,447.93 in a year.

Golub said in December 2010 the S&P 500 would end this year at 1,325. He raised that estimate to 1,425 in February before cutting it to 1,350 in September, a 7.7 percent advance from yesterday’s closing level. The average estimate of 12 strategists calls for the benchmark measure to end 2011 at 1,295. Golub said in 2010 the S&P 500 would finish the year at 1,350 before reducing that estimate to 1,150 in July 2010. The equity gauge rallied 13 percent to 1,257.64 last year.

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