The U.S. stock market had a strong first quarter in 2013. The S&P 500 rose 10.6% (reaching an all-time high). The Russell 1000 was up 11.0%, the Russell Mid Cap 13.0% and the Russell 2500 12.9%.

We still expect U.S. GDP growth of around 2% in 2013. Recent economic reports suggest robust first quarter GDP growth but this forecast comes off a very weak fourth quarter 2012 report. While consumer spending is running at around 3.5% this quarter, it has been fueled by a worrying drop in the personal savings rate. The economy, too, is not yet reflecting potential effects of tax rate increases or the "sequester", with the attendant fiscal drag. Inflation and interest rates are likely to stay low, which are positive factors - the US's energy boom will help keep prices down and help consumers. Housing continues to perk up and the job market is improving. Corporate profits should continue to climb at a modest rate, since we expect revenues to rise. Meanwhile Europe remains in recession and China's market has been flat which is unhelpful for U.S. exports.

We believe the U.S. stock market will continue to rise modestly from now until year end. The valuation of the S&P 500 is fair on a trailing basis and is slightly undervalued on forward measures. Compared to the 2007 stock market peak, the S&P 500 has halved its leverage, profits are 13% higher, dividend yields are up slightly while interest rates are down approximately 2.8%. The U.S. continues to be viewed as a safe haven compared to other markets and US stocks are relatively attractive compared to competing domestic asset classes. This will provide momentum for the "great rotation" as investors continue to move into equities in search of better returns.

The years since 2000 have highlighted, however, the fragility of financial markets in times of stress. At time of writing, the crisis in Cyprus appears to have abated but another such crisis in a larger economy could threaten bank and financial system safety and send world markets lower. There continue to be geopolitical instability on the Korean Peninsula and the Middle East. There will also be some uncertainty around the timing and impact of the ending of the Federal Reserve's easy money policy. On balance, however, we stay bullish on U.S. equities.