We are positive on equities as:

1.Macro momentum has peaked, but our work indicates that historically equities have continued to advance over the next 12 months post these peaks. There are similarities to '04 in terms of market volatility during the transition from lead indicators peaking towards greater clarity regarding the sustainability of recovery. Slowdown in manufacturing is clear, but beyond profit taking at sector level, our ISM framework does not work as a sell signal for the overall market at this stage.

2. Our Yield curve framework is still giving a positive signal. Despite last quarter's flattening, the curve is still in the top 10% of record steep observations. To get around the problem of zero short rates, we found that the 10y-30y year spread was also a strong indicator of recessions. Right now it is near record steep, a positive. Historically, it took 29 months between the peak in curve steepness and the next recession.

3. Interbank stress has reduced markedly, peripheral bond yields and CDS spreads have moderated.

4. Profits are on the upturn, although 2H surprises are likely to slow significantly.

5. Rotation away from inventory rebuild and fiscal support towards increasing evidence of sustainability of recovery in private demand (capex, labour market, smaller businesses).

6. DM inflation risks minimal, allowing central banks to remain accommodative for longer, countering the headwind from fiscal consolidation.

7. Equity valuations undemanding in absolute terms and vs other asset classes. In terms of market catalysts, we think that: 1. The fact that a number of key events are now behind us could act to reduce the tail risk that markets are pricing in going forward. US financial regulatory bill was passed, stress tests are behind us, there is more clarity on Basel3, July was the peak month of Spanish refinancing. The underlying problem is not going away, but at least the hurdles for next few quarters are getting easier. 2. Chinese policymakers are turning more market friendly as CPI peaks and economic momentum slows.

Key risks: "Double dip" near term. We see the five-year outlook to be far worse than the 12-month one.

Eoin Treacy's view The steepness of the US yield curve (10yr-2yr spread) is a much better predictor of recessions than growth. Since it is only now topping out, it could be a few years before we again reach a position where monetary conditions offer a significant headwind to the US economy. In fact, because it is topping out rather than continuing to expand it could be viewed as a vote of confidence on the part of policy makers that the need for such incredibly accommodative conditions is less pressing than it has been over the last few years.

Both the TED and OIS spreads have hit medium-term tops and are contracting once more which indicates that stress in the banking system is beginning to recede.

There is still plenty to worry about. For example, the housing market has yet to bottom, federal, state and municipal deficits are alarmingly high with no apparent substantive plan as to how they are to be contained, unemployment remains high and growth has been slow to pick up. Even so, provided monetary policy remains comparatively accommodative and the banking sector continues to stabilise, Wall Street's is unlikely to revisit its 2009 lows and could continue to do substantially better than that over the medium term.