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Wall St. Strategists Making More Bullish Calls for 2011

As the equities market quietly side-steps rising interest rates, Wall Street prognosticators in general are getting more bullish for next year.

J.P. Morgan's chief U.S. equities strategist Thomas Lee Friday put a target of 1425 on the S&P 500 for 2011, a 15 percent gain. Barclay's Capital Thursday called for 1420 in 2011 and expects a good environment for stocks for at least the next couple of months.

Goldman Sachs also recently released its forecast, and it sees a more than 20 percent increase next year to 1450.

Goldman Sachs chief strategist David Kostin said he's spoken to more than 100 clients since announcing his 2011 call earlier this month, and they are not as bullish as he is.

"We are more bullish than most people...most people are not at 1450," he said. "...They have reservations about whether the economy will recover as quickly as we think it can."

Kostin said 2011 will be the first year in several where the stock market could be driven by U.S. growth. "It's about being cyclical versus being defensive, and the idea that growth is continuing is a fundamental building block for our strategy in 2011, in contrast with the strategy of the last couple of years," he said.

"It's really about the U.S. recovery, and you look at election cycles. The third year of presidential terms are historically good years for the stock market," Kostin said.

As strategists set their 2011 stock market targets, economists have been raising their growth forecasts. A major catalyst this week has been the tentative tax deal announced by President Obama that would extend all Bush-era tax cuts for two years and add a new one-year tax break on Social Security taxes.

Pimco Thursday raised its growth outlook to 3 to 3.5 percent for next year, from 2 to 2.5 percent, because of the hefty stimulus push, according to Chief Executive Mohamed El-Erian.

"Maintaining such a growth rate beyond 2011 requires additional measures to enhance competitiveness and achieve medium-term fiscal consolidation," he wrote in a quick note.

Bond Market Steadies

Traders say the better outlook for the U.S. economy has been a big driver of interest rates in the past week, but at the same time the Treasury market is reacting to the fear of growing U.S. budget deficits. There is concern that rising rates will reign in the gains in stocks, and some traders say if the 10-year yield moved up to 3.5 to 4.0 percent that could start to trouble equities.

Knapp, who heads equities portfolio strategy, does not see the move in rates as an obstacle for stocks for now, and he expects the Fed's purchases of Treasurys to help keep rates from rising too much. Kostin also believes the rise in rates will be constrained.

Steve Massocca, managing director at Wedbush Equity Management, said the current move in rates might actually be good for stocks. The 10-year yield at "3.25 isn't enough to draw new money into bonds, but it's high enough to scare money out and into equities," he said. "The psychology of this move is one that prompts selling in bonds, not buying, in my opinion."

Rates continued to move higher Friday, and the 10-year yield was 3.26 percent, after spiking to as high as 3.34 percent Wednesday during the government's 10-year auction. The rise in rates has been supportive of the dollar, which gained more than a percent this week against the euro and the yen.

"I think we're going to be in a range trade, probably for the next two weeks," said Jefferies Treasury strategist John Spinello. "I think 3.40 (10-year yield) will be the upper end of the range into the week after next..I think the corrective rally we'll go through could take us to 3.10, 3 percent."

Financials in Favor

A common theme in several strategists' calls is a new respect for financial stocks.

"I'm not ready to say it's all clear" for the group, said Barclays Capital's Barry Knapp, but he has put them at market weight. Financials have been gaining favor as an undervalued group, as more investors see them as an unloved recovery play. Investors are also betting banks may start to raise dividends.

The KBW Banking Index is up nearly 5 percent this week, as traders also bet a steepening yield curve would help bank profits. Year-to-date, the S&P financial sector is up just 8 percent, compared to the richer moves of 20 percent for industrials and 25 percent for consumer discretionary stocks.

Too Bullish?

"I am somewhat wary of the fact that most of the strategists are bullish as well," cautioned Knapp, as he wound up a press briefing on the firm's outlook.

Knapp expects 9 percent U.S. earnings growth and continued margin expansion in 2011. He also expects revenue growth to be about 5 percent, higher than nominal GDP due to the boost from foreign sales.

But Knapp still sees plenty of potential headwinds for stocks next year, including the possibility of a new chapter in the European sovereign debt crisis. "Their banking system is at at least six months, if not a year, behind ours," he said.

"I think Europe is going to struggle with these major issues for some time," he said. Another headwind will be the U.S. deficit situation, which he expects will periodically get attention and become a problem for stocks. He also said there is a concern that China, which is raising interest rates, could tighten too much, damaging global growth.

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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