NEW YORK (The Street) -- There will be few easy gains this year as U.S. stock prices tread water, strategists warn, but select sectors present rich opportunity.
While there are few expectations that the S&P 500's 26% jump in 2013 will be repeated, fund managers say stocks will continue to benefit from the ongoing U.S. economic recovery.
Wells Fargo Securities Senior Analyst Gina Martin Adams forecasts 7% earnings growth in 2014 and favors technology, health care and financials. These sector picks are backed by UBS and ING, with the latter also pointing to industrials and consumer discretionary.
"Slightly stronger earnings growth should be driven by better revenue growth via stronger business investment, export growth, and a reduced drag from fiscal tightening," Adams told investors in a note.
She is underweight consumer staples, utilities, telecoms, energy and materials - suggesting the demand backdrop for these sectors is challenging. She expects the S&P, currently at 1828.3, to be around 1850 by the year-end.
UBS executive director of US Equity Research Julian Emanuel expects higher stock prices, higher interest rates and higher volatility in 2014.
"We expect a period of choppy rotation where laggard sectors such as energy and materials gain on the momentum areas such as consumer discretionary," he told clients in a note. If this volatility begins to look like a correction - a fall of 10% or more from the last market peak - Emanuel advocates buying when the volatility index spikes above 20. The investment bank has a year-end target of 1,950 for the S&P 500, representing a total return of 7.5% from last year's closing levels.
ING strategists are more bullish. Chief market strategist Douglas Cote has 2020 as a year-end index target for the S&P 500, reflecting a 10% boost to earnings from global economic expansion.
Cote favors sectors such as consumer discretionary, technology and industrials - the latter underpinned by global expansion into the so-called frontier markets. As growth picks up, he expects earnings for small and mid-cap stocks to outpace large caps.
More broadly, ING Investment Management sees Europe as the only developed country or political zone at immediate risk of a "double-dip" recession - with Germany the exception. The manager is optimistic on the outlook for China, noting recent signs of stabilization and reforms that aim to restructure its economy.
Amongst financial stocks, Deutsche Bank analyst Matt O'Connor warns that Citigroup (C), JP Morgan (JPM), and Morgan Stanley (MS) have the most downside-risk, all due to lower revenues from their fixed income, currencies and commodities businesses combined with higher litigation costs (JP Morgan alone faces up to $20 billion of legal costs in the past year). He likes Goldman Sachs (G), suggesting it is poised to benefit from a lower compensation to revenue ratio and stronger investing and lending revenue. "If M&A continues to pick up in 2014, Goldman Sachs should be the most levered of the banks we cover," O'Connor told clients in a note. Evercore analyst Andrew Maquardt favors Bank of America (BAC), pointing to its strong capital position, expense and credit leverage, a better housing outlook and attractive valuation.
Emanuel said investors should remain attuned to market entry-points. "The fast and furious finish to 2013 represents a challenge to stocks in early 2014 [but] a buying opportunity from lower levels could well materialize in the first quarter," he said.
-- By Jane Searle in New York