Big U.S. stocks are providing some shelter from cascading world equity markets but they are far from a safe haven.

With the S&P 500 flirting with bear-market territory, U.S. stocks look like the winner of an ugly dog contest. The outperformance of U.S. equity markets this year is more a statement about finding pockets to hide in stocks rather than the fundamental strength of the United States.

Outperformance has been due to the biggest and often most defensive U.S. companies in the market, many with high overseas exposure, especially in Asia, where growth is still strong. Smaller-cap stocks with more exposure to the U.S. economy have been hit just as hard as European markets.

That means U.S. equities may not provide much in the way of succor in a worst-case scenario where large world economies slip back into recession.

Investors have been selling defensive large-caps slower, said Robert Sluymer, an analyst at RBC Capital Markets in New York. The mega caps, the large caps, will continue to outperform -- but that's really a defensive statement.

The Russell Top 50 index <.RU50>, which measures the performance of U.S. mega-caps, is down around 12 percent this year, compared with a 14 percent drop for the S&P 500 <.SPX> and a 22 percent slide for the small-cap Russell 2000 index <.RUT>.

Other broad markets have fared worse than the S&P 500.

The iShares MSCI EAFE Index exchange-traded fund , which tracks developed markets, excluding the United States and Canada, is down 21 percent this year. The damage is more extensive in places like Brazil and Italy, with indexes down about 30 percent to 37 percent. The iShares MSCI Emerging Markets Index ETF has lost 29 percent so far in 2011.

We are still very bearish, said Paul Zemsky, head of asset allocation at ING in New York. Our biggest position is just being underweight equities.

Zemsky said he is overweight bonds, including high-grade corporate bonds and some high-yield.

Several factors still suggest declines in U.S. large-cap names will not be as great as those in emerging markets and Europe.

Zemsky says U.S. fund managers are increasing weightings to the United States in portfolios that were previously underweight relative to emerging markets, which could drive outperformance.

TIME IS ON U.S. STOCKS' SIDE

The euro's fall to an eight-month low against the dollar is also increasing the relative attractiveness of U.S. dollar-denominated assets, giving investors another reason to own U.S. rather than overseas stocks.

U.S. economic data -- such as Monday's manufacturing and construction reports -- indicate that U.S. economic slowdown is not as bad as feared and may be less severe than elsewhere.

Still, in markets driven by fear, investors are unlikely to take much notice of niceties like those.

If you were looking at any of the economic statistics that came out of the U.S. over the past few days, there is no reason for the market to be acting the way it is -- valuations mean nothing, fundamentals mean nothing, Zemsky said.

Goldman Sachs points out that markets will stay under pressure even with signs of stabilizing economic data while financial conditions -- such as bank funding costs --- show signs of tightening, and stresses remain on banks.

Despite policy action, broad financial conditions in the U.S. and Europe have tightened further in recent weeks, Goldman Sachs analyst Dominic Wilson wrote in a Monday not.

Bank equities and credit remain under pressure on both sides of the Atlantic, though not quite at the lows seen a little over a week ago.

On Tuesday, Goldman Sachs once again cut its year-end target for the S&P 500 to 1,200.

At the start of 2011, Goldman was one of the most bullish on Wall Street, with a year-end S&P target of 1,450.

Signs are that investors with a long-time horizon are taking opportunities to pick up beaten-down stocks globally.

Alex Motola, a portfolio manager at Thornburg Investment Management, where he manages portfolios with both domestic and international exposure, said valuations across the equity spectrum have come down to attractive levels.

There are pretty good reasons to think there is money to be made in stocks, he said.

If you really want to make money over the next 10 years -- and for an institutional investor, you need some expected rate of return -- you're going to be having to buy stocks.

(Reporting by Edward Krudy; Editing by Jan Paschal)

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