All good things must come to an end, including the dream run in U.S. equities, according to HSBC, which has downgraded its view on the country's stocks to underweight from neutral.

"Global equities initially shrugged off the start of Fed [Federal Reserve] tapering. But, as the Fed continues to cut asset purchases this year and markets start to anticipate the first rate rise in 2015, we think this will present a headwind for equities, particularly in the U.S.," Garry Evans, global head of equity strategy at HSBC wrote in a report on Wednesday.

According to the bank's forecasts, the S&P 500 will rise just 4 percent to 1,900 in 2014, following gains of 30 percent in the previous year.

"With earnings key, we favor countries and sectors with the greatest potential for upside surprises. So we cut the U.S. to underweight because earnings are near record highs, valuations look stretched relative to the rest of the world, and the Fed is moving towards ending monetary easing more quickly than other developed-market central banks," Evans said.

While he doesn't expect U.S. earnings to fall from here, Evans says there are signs of a slowdown in earnings momentum – a contrast to Europe where earnings are likely to see a strong rebound from depressed levels. The bank is overweight Europe equities, forecasting 14 percent upside for the FTSE Eurofirst 300 index this year.

"And it is a similar story on monetary policy," said Evans. "Whilst the policy environment remains attractive in absolute terms, the direction of change is negative relative to other regions. Whilst the Fed has now begun to scale back its extraordinary measures, there is scope for the ECB [European Central Bank] to loosen policy further given the on-going disinflationary pressure in the euro zone," he said.

David Fuller's view

This is very similar to what I have been saying in Comment of the Day and particularly in the Daily Audios.  Additionally, the USA has been outperforming for good reasons, not least its competitive cost of energy thanks to fracking, and its lead in the incredibly exciting field of technological innovation.  The USA was also the first developed country to utilise quantitative easing (QE), although based on its current GDP growth prospects this programme will be reduced significantly in 2014, if not actually ended.

 The USA’s economic benefits from fracking and a growing lead in technology will remain long-term bullish factors.  However, as confidence in the economic prospects of other regions slowly returns, more investment will be allocated towards Europe and the Asia Pacific region, not least Japan and China on the basis of valuations.   

 Technically, the European situation remains promising as a number of these markets are still in the early stages of recovery. I would broadly give Europe’s upside prospects the benefit of the doubt while the DJ Euro Banks Index remains above its rising 200-day moving average. If it can maintain this week’s upside breakout it will have completed the first step above the base extension phase evident since April 2011.  Confidence will increase if it can sustain this move and also push above the next area of lateral resistance near 150.  The DJ Euro STOXX 50 Index appears to be forming a first step above the entire V-bottom with right-hand extension base formation, as taught at The Chart Seminar.  I would only question continuing upside scope if it proves unable to stay above the yearend reaction low near 2900 for any reason.    

 Here are some European Indices for individual countries, followed by brief comments.  Denmark’s move has been phenomenal, rivalling Wall Street, including on valuations which now show a current p/e of 24.60 and yield of 1.75%.  I would treat this market cautiously because it is expensive and overextended relative to the MA.  Norway remains in impressive form but watch for an eventual break of the main consistency characteristic which is the progression of higher reaction lows.  Sweden is clearing its 2007 high and would need to close beneath 1270 to question overall upward scope.  Greece remains in recovery mode provided it first remains above 1000 and then maintains the progression of higher reaction lows.  Portugal is temporarily overextended but give the upside the benefit of the doubt while the sequence of higher reaction lows is maintained.  Spain has resumed its recovery with the recent push above the psychological 1000 level.  Italy is testing last year’s high where some resistance is possible but it would have to break its yearend low near 17,700 to delay significantly higher scope.   There is talk of France slipping back into recession but given the higher reaction lows I would give the upside the benefit of the doubt provided it remains above 4000. The UK’s FTSE All-Share Index appears to be consolidating near the 2007 highs and a close beneath 3400 would be required to question the overall upward bias.  Meanwhile, the FTSE 250 Midcaps Index is maintaining its outperformance but watch for an eventual break of the higher reaction lows as this would most likely check overall upward momentum.  Germany also rivals Wall Street on this total return Index.  It is overstretched but has yet to show a clear loss of momentum.  Watch for an eventual break in the rising lows as this would signal at least a medium-term correction.  Ireland is somewhat overstretched in the short term but a close under 4300 would be required to check momentum beyond a temporary pause.  The Netherlands would require a decline beneath 370 to check the current uptrend consistency.  Switzerland is testing the upper side of its current range which formed following the big overextension relative to the MA in May.  It may still encounter some temporary resistance at these levels but a close beneath 7740 would be required to further question medium-term scope for higher levels.  

 Lastly, while Wall Street remains firm Europe generally should do even better.  However, such is the US market’s influence that when the next correction of at least 10% (we have not seen this during the last 581 days) occurs, Europe and most other regional stock markets will be pulled lower as well.