Market Insider

2014 themes: Chasing returns and rising interest rates

The new year will have stock investors looking for earnings growth amid rising interest rates, while those who missed out on Wall Street's multiyear rally will be trying to get in on the action.

"When we close the books tomorrow, this will be the first year since 2007 where we had positive equity flows for the calendar year," said Darrell Cronk, regional chief investment officer for Wells Fargo Private Bank. "It has been a great year for stocks and not such a great year for bonds; we expect that trend to continue in 2014."

Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said, "Chasing returns is not a good reason to invest, but when enough do it, the short-term impact is more buying and higher prices. Absent large-scale profit-taking or an incident, we may see another inflow of funds and another short-term uptick from investors chasing profits in the first few weeks of the year."

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One concern is how the market would react to a pause in earnings growth, said Silverblatt, who wonders "how companies can continue to squeeze out higher earnings without higher sales."

Cronk said that "our analysis suggests somewhere around 5 percent earnings growth" in a changing dynamic between "growth winners versus just liquidity winners." As that rotation happens, he added, "investors should be thinking about who benefits in a rising interest-rate environment."

"Technology and industrials have both historically done well in rising interest-rate environments, and tech is the only sector that has more cash than debt on [its] balance sheet," he said, adding that both sectors have high levels of foreign exposure—good, given his view of an improving global economy.

But there is a final trading day in 2013. Wall Street's last session of the year tends to to be a muted affair amid exceedingly light volume, but Tuesday could run counter to the historical trend.

Stocks usually "drift down on end-of-year tax selling on the final trading day," as it's the last chance to realize those tax losses, Cronk said.

But there's a problem.

"With about 50 percent of the S&P 500 setting all-time highs, it's hard to find things that are down," Cronk said. "The rising tide has risen all ships in 2013."

—By CNBC's Kate Gibson

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