Prudential Predicts a Historic Decade for Stocks

Updated to add the paragraph on multiple expansion.

NEW YORK ( TheStreet) -- Prudential Financial, the asset management and insurance company founded in 1875, says this year may host a historic event: the beginning of a decade in which stocks outperform bonds, the first time in a generation.

While bonds have led equities for three decades, Prudential's investment team "would not rule out the possibility of a shift this decade to a regime where stocks offer not just superior returns, but a superior risk/return trade-off compared with bonds."

Prudential Chief Investment Strategist John Praveen predicts the S&P 500 Index will rise to 1,430 by year-end, a gain of 13%. For reference, Goldman Sachs ( GS) estimates the S&P will only reach 1,250 (about flat compared to 2011) and Morgan Stanley ( MS) estimates the S&P will decline to 1,167 (down 7% over last year).

Low stock values, near-record-low interest rates, robust corporate earnings and modest growth in the overall economy (2.4% versus a consensus of 2.1%) will propel the equity market, he said. The risks are the uncertainty of the eurozone debt crisis, gridlock in Washington and a potential hard landing of China's economy.

With that backdrop, Edward Keon, portfolio manager of Quantitative Management Associates at Prudential, said the burden of proof has shifted from stocks to bonds. He said stock prices are "much more volatile than you would expect, due to changing fundamentals." But Keon still sees a surprise to the upside in stocks as more probable in 2012 than a surprise to the downside.

All of the issues we are worried about are the things the market well knows and are probably embedded in stock prices," he said.

History has proven that returns in the stock market have been far more consistent, offering 5% to 8% upside on average, compared to bonds, which have returned anywhere from a negative 3% to positive 8% to investors. Stocks have been able to show much better resiliency throughout periods of high volatility and inflation as they participate in the real growth of the economy. Bonds have more outside factors that affect them.

Praveen likes where current stock valuations are - near the lows seen in 2007-2009. This along with the low interest rates will provide a support system for the expansion of multiples.

Industrial and technology are Praveen's top sector picks for 2012. Improvements in business confidence is helping support growth in both of those industries, and while technology will likely see more growth as consumer electronics remain in high demand, infrastructure spending will help drive the industrial sector higher this year.

Caterpillar ( CAT) has been a consistent performer in the industrial sector, while Apple ( AAPL) and Qualcomm ( QCOM) are favorites of many in the tech space.

Praveen is also cautiously optimistic on the consumer-discretionary and consumer-staples sectors. An improving U.S. job market should help support consumer spending, and consumer staples remain a safehaven from eurozone volatility.

Sectors that Praveen recommends avoiding include financials, telecoms and utilities.

-- Written by Lindsey Bell in New York.

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