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Squawk on the Street

10 Themes for 10 Sectors in ‘07

Merrill Lynch Chief U.S. Sector Strategist Brian Belski is predicting a positive year for 2007 – but don’t expect the same portfolio plan to reap profits. Those energy, utilities and materials stocks that have been riding high for the past couple of years have reached their peak, he says.

The Fed’s indecision is going to cause to volatility in the markets as far as Belski is concerned.  Analysts aren't sure what’s coming next – a rate hike or a cut – so he’s expecting a rotation back to more defensive stocks such as consumer staples and health care. These stocks offer growth with less risk.

There’s also potential for a bond rally in early ’07, Belski says, as the market becomes more defensive overall.

The bottom line, according to Belski, is that the U.S. economy will be positive next year, growing in the high single digits or low double digits. After that early-in-the-year volatility, investors can buy back into stronger growth stocks like technology, telecom and discretionary spending.

Here are Belski’s 10 themes for 10 sectors in 2007:

Telecom Services: infrastructure and renewal
Consumer Staples: franchise growth
Industries: weakening U.S. dollar and exporters
Information Technology: investor desire to own technology again
Health Care: U.S. political landscape 2007-08, Democrats and Republicans likely both to become more moderate
Consumer Discretionary: potential for low interest rates, declining oil prices, and a weakening U.S. dollar outweighing the negative affects of a slowdown in housing
Financials: discounting the Fed too early
Material: Short-term supply versus long-term demand tug-of-war
Utilities: expensive, not defensive
Energy: momentum and speculation are likely peaking

Sectors for 2007