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Equity Prices to Rise Up to 10%: Pro

Scott Eells | Bloomberg | Getty Images

Despite uncertainly stemming from ongoing "fiscal cliff" negotiations, one analyst sees as much as 10 percent upside for U.S. equities in the new year.

Andrew Root, Macquarie Research's head of U.S. research, told CNBC's "Squawk on the Street" that he thinks earnings will grow despite likely first-quarter choppiness due to fiscal policy uncertainty.

"The China market is much better," he said. "U.S. residential housing is in good shape, so we expect stocks actually to be higher 12 months from now than they are today."

Root expects equity prices to rise between 5 to 10 percent next year.

"I think it's very clear that the U.S. housing market is in much better shape so there are some industrial stocks (Stanley Works is an example) that should be growing earnings through the course of the year almost regardless of whether or not the U.S. fiscal cliff gets settled in a satisfactory fashion," he added.

Depending on whether lawmakers do a "good job" resolving the cliff, U.S. gross domestic product growth next year could be anywhere from about 1.5 percent if they do not to about 2.5 percent if they do, Root forecast.

"But within that range, you still should see some early cycle pro-cyclical names do relatively well — U.S. housing sensitive names chief among those," he said.

After homebuilders rose dramatically this year, Root said "the next trade is probably more toward the companies supplying those companies."

He also noted a substantial improvement in the conditions in equities and economies outside of the U.S. and said he sees support from China and Asia ex-Japan economies.

"What that means is that some of the companies that are export oriented have a good chance of outperforming the S&P as well," he said.

Root cautioned investors against adopting an automatic risk-off mentality.

"If earnings continue to grow, strong themes like mobile data, U.S. housing will continue to offer opportunities to make money, so it's a mistake to be out of the equity market altogether," he said.

—Written by CNBC's Katie Little. Follow her on Twitter @katie_little_

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