Hedge fund Omega Advisors sees stocks rallying despite Fed

By Lawrence Delevingne

NEW YORK (Reuters) - Hedge fund firm Omega Advisors expects the U.S. stock market's bull run to deliver returns of between 7 percent and 9 percent over the coming year, fueled by steady economic growth and a corporate takeover boom amid slow, gradual interest rate hikes.

Omega, overseen by Leon Cooperman and Steven Einhorn, said the Federal Reserve's impending tightening cycle will not derail the momentum in equities, according to Omega's second-quarter investor letter to clients, obtained by Reuters on Tuesday.

Omega, which oversees approximately $8.9 billion as of June 30, declined to comment.

Omega cited the Fed's slow and gradual pace of tightening as one of the "magnificent seven" items that will extend the bull run. "A U.S. monetary policy that does not become hostile to risk assets or economic activity for at least several more years," the letter, which was signed by Cooperman and Einhorn, added.

The other five items include:

- A U.S. economic expansion that will last for at least several more years, bringing with it an extended period of earnings and dividend growth, significant share buybacks and substantial mergers and acquisitions.

- Real growth of between 2 percent and 3 percent.

- "Sweet spot" inflation between 1.5 percent and 2.5 percent.

- "U.S. equity market valuation which is not currently excessive and/or speculative."

- Investor sentiment and positioning inconsistent with the end of the bull market.

Omega said the current price-to-earnings ratio on the S&P 500 of approximately 16.5 times forward earnings is "about right," indicative of a fairly valued market.

"We are not of the view that the U.S. equity market has reached a problematic/excessive level of absolute valuation relative to earnings, cash flow, free cash flow, return on equity, and return on invested capital," Omega said. "The current U.S. equity bull market will last quite a while longer than the next 12 months."

(Reporting By Lawrence Delevingne; Editing by Jennifer Ablan and Dan Grebler)

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