Yes, the U.S. recovery has been modest, but it still has legs—if wobbly—this year.
For starters, US economic growth is widely expected to out-muscle Europe and Japan, and the positive signs are increasingly heartening, pushing analysts to raise their GDP estimates.
“The recovery is real,” says David Darst, chief investment strategist at MorganStanley SmithBarney. “But it will, at times, be halting and anemic.” He predicts that GDP growth will notch four percent this year, compared to 4.4 percent globally.
So, many analysts, including Darst, are bullish on stocks—especially multi-nationals with high dividends and attractive price-earnings ratios. “Don’t be underweight in global gorillas that are under loved,” adds Darst.
Dynamic emerging markets will grow 6.4 percent this year, adding oomph to U.S. industrial stocks. Of the BRICs India and China are set to notch the strongest gains and Brazil the lowest, according to MorganStanley estimates.
“Business spending has stayed very strong,” says Priya Hariani, U.S. equity strategist at Bank of America Merrill Lynch. She thinks such spending will increase nearly 14 percent in 2011.
And even cyclical industries like autos are starting to grab attention, while areas like technology and health care are seen as under-valued.
“Technology is trading at 14 times earnings,” she says. “This is the cheapest it has been since 1995.”
Many factors could temper the growth though.
“We still have high indebtedness, weak housing prices and high unemployment,” says Darst. There’s also austerity at state and local governments, which account for 12 percent of the nation's GDP. “A few pieces of bad news could cause a correction,” he adds.
And near-term, the market—already up almost 100 percent since March 2009—has run ahead of itself," say some analysts.
Use the pullback as "buying opportunities for the second leg,” says Darst, who thinks we’re in a multi-year bull market. “But this rally is to be rented and not owned. It’s two steps forward, one step back.”
Tech And Health Care
Harini likes the under-valued technology titans likeIBM(NYS: IBM), HP(NYSE: HPQ), Microsoft , and, of course, Google .
“Microsoft is woefully undervalued,” adds Dirk van Dijk, chief equity strategist at Zacks. “It’s got a bullet-proof balance sheet and it’s buying back stock.”
Van Dijk, a self-described value guy, also sees health care as a buy for defensive investors. Johnson & JohnsonNYSE: JNJ) is selling at a big discount to the market, he says, adding that Medtronic andMerck also look “dirt cheap.”
The auto sector also has fans.
“It was written off for dead just a few years ago,” he says. Now bothGM( and Ford Motor are extremely profitable—and lean. He expects 15-percent EPS growth this year.
Energy And Industrials
Hariani, like other analysts, expects energy stocks to notch double-digit gains, as oil prices rise to $100-plus a barrel. She likes Exxon Mobil and Apache .
Drillers who can navigate deeper wells also look good to analysts. Van Dijk expects Transocean and Diamond Offshore Drillingto profit. “It’s harder and harder to find oil,” he adds.
Industrials, driven by spending in emerging markets, are also favorites. Harini likes aerospace companies like United Technologies , Boeing and Honeywell . Transportation also looks strong, add analysts.
Investors with higher risk appetites could benefit from financial stocks, many of hich are expected to up dividends, but analysts are divided on the group.
Hariani likes big banks like JP Morgan Chase( . “The two D’s are helping banks,” says Darst, who also favors banks. “They are Dodd-Frank reform, which is more bank friendly, and dividends.”
“I don’t trust the numbers,” counters van Dijk. “It’s a massive risk."