NEW YORK (The Street) -- Strategists expect earnings growth of up to 10% to underpin ongoing equity gains this year, with technology, industrials and health care the top ranked sectors for returns.
As earnings season kicks off, financials and consumer staples have fallen from favor, with stocks such as Bed Bath & Beyond (BBBY - Get Report) and L Brand (LB - Get Report) suffering amid lackluster forecasts while Macy's (M - Get Report) has rallied after slashing costs.
Industrials are favored for their exposure to improving global growth. For example, Karyn Cavanaugh, market strategist with ING U.S. Investment Management, notes global GDP has risen from $35 trillion a decade ago to $74 trillion today. As a result, additional growth is magnified from a far larger base. "Industrials are [exposed to] global expansion and people are not talking about that enough," she said in a phone interview. New York-based Cavanagh helps oversee $196 billion in funds.
Jeff Saut, chief investment investment strategist at Raymond James, prefers growth to value stocks -- companies that can generate good cash-flow amid slowing earnings momentum. Many IT and health care stocks fall into this basket and boast attractive valuations, Saut says. While the unknown impact of national health policy has caused some to shy from the sector, select bio-techs independent of politics are well-placed, according to South Texas Money Management president Jim Kee.
Kee predicts 8% to 9% earnings growth based on a strengthening economic backdrop, with gains of between 7% to 9% for the S&P 500. "The private sector has also completed its de-leveraging, so debt-to-income ratios have come down," the San-Antonio based manager said in a phone interview. "We see a lot of value in big cap tech names." He noted momentum would likely improve in the second half after issues such as the debt ceiling have passed. Kee helps oversee $2 billion in funds.
Building products and homebuilding stocks will also benefit from an uptick in demand, according to Brownstone Investment Group's head of trading Jon Sablowsky. On the flipside, he is cautious on retail stocks, predicting flat to lower discretionary spending over the course of the year.
Like many traders, Sablowsky is holding financial stocks at arms' length amid valuation concerns and a rising rate backdrop. "Financials will not [perform] as well as in 2013 -- they got a lot of tailwinds from stimulus and high interest rates will hurt at first, though eventually they will do better," Cavanaugh said, referring to the longer-term margin benefit to financials from higher rates.
More broadly, Kee says rising rates will hurt bond-like stocks such as telcos, staples and utilities -- those that benefited as stimulus underpinned gains, but stand to suffer as the economy recovers.
-- Written by Jane Searle in New York