NEW YORK (TheStreet) -- T. Rowe Price, an asset-management firm that oversees $450 billion, says shares of some technology firms, cyclical companies and luxury retailers may offer outsized returns next year as the economy expands and corporate profits rise.
Baltimore-based T. Rowe Price, which opened its first mutual fund in 1950, expects the U.S. economic recovery to be modest but sustained through 2012. Gross domestic product will expand 2%, compared with 1.5% this year, and the unemployment rate will be little changed, the company forecasts.
Long-term stock winners will be those that are of a high quality but trading at a discount to historical valuations. As history has proven, there is a correlation between low price-to-earnings ratios and 10-year stock returns.
While T. Rowe still expects so-called macro events -- trends in the larger global economy, such as the European debt crisis -- to weigh on equity markets, the company's bullishness is driven by the fact that valuations are low and corporate balance sheets are in the best shape they have been in for a long time.
Price-to-earnings ratios are at a 20-year low and approaching a 60-year low. The
S&P 500 Index
of the largest U.S. stocks is trading at a P/E ratio of almost 12, which compares to 26 in 2000. T. Rowe pointed out that since the start of the decade, the S&P 500 is down 15% but corporate earnings have increased 71%, driving the valuation of the benchmark index lower.
As we exit 2011, market volatility has spiked and market correlations have exceeded levels seen during the Great Depression. Volatility is a measure of uncertainty among investors, while market correlation measures whether stocks move in line with macro events. Stocks are responding to macro events more than they are to fundamental company news, creating a disconnect that's confusing to investors.
That has made stock picking difficult. But given that U.S. Treasury yields are a rock-bottom 2%, equities offer a better opportunity to make money. S&P 500 dividend yields are trading above the Treasury yield for only the second time in 50 years, according to T. Rowe.
For T. Rowe, technology will be a key area of interest, especially as mobile devices and cloud computing become increasingly important in everyday life.
, which is in the process of buying Motorola Mobility, and
, whose technology is used in
iPhones, are two quality tech stocks that might fit into T. Rowe's portfolio.
Certain cyclical stocks and companies that have exposure to the aspirational consumer in emerging markets are also areas of interest for T. Rowe. When applying the characteristics of high quality, strong balance sheets and discounted valuation in those sectors, stocks including chemical maker
, railroad company
and luxury retailer
stick out as interesting opportunities.
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