U.S. stocks to make solid gains in 2009

NEW YORK (Reuters) - U.S. stock markets will end 2009 with gains of more than 10 percent after an historic plunge last year as more signs of economic recovery emerge and corporate earnings rebound, a Reuters poll showed on Tuesday.

That's a more optimistic view than in March, when Reuters poll participants expected the S&P to end 2009 with just minimal gains. Since then, the broad U.S. stock market has rallied by more than a third.

The survey of 25 analysts taken over the last week and a half showed a median target of 1,000 for the benchmark Standard & Poor's 500 index, compared with a median forecast of 920 in March. The index closed at 927.23 on Monday.

For the Dow Jones industrial average, the median forecast was 9,300, up from a forecast of 8,500 in the March poll. The Dow closed at 8,529.38 on Monday, and ended 2008 at 8,776.39.

"By the fourth quarter ... expectations will start to rise, the economy will be emerging from a recession, then we'll start to see real signs of earnings growth, and I think that will be the next leg up for the stock market," said Jeff Kleintop, chief market strategist at LPL Financial in Boston.

He sees the S&P at 1,000 by year end.

Last year, the S&P closed down 38 percent, its first annual loss in six years and the worst drop since the 1930s, as the housing slump and resulting crisis in the financial sector gripped the economy.

If the S&P 500 ends at 1,000, that's a gain of 10.7 percent from its 2008 closing level of 903.25 and an increase of nearly 8 percent from Monday's close.

Early signs the economy was recovering helped stocks to rally from March through early June, pushing the S&P up as much as 40 percent from a 12-year low on March 9. The rise has lost steam in recent weeks, however, as investors looked for more proof that the economy was emerging from its recession.

Some strategists see more of the recent trend continuing through the summer, with a pick-up occurring later in the year.

"There are green shoots," said Peter Cardillo, chief market economist at Avalon Partners in New York, who sees the S&P ending 2009 at 1,025.

"We are not headed for a double-dip recession."

Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said going into 2010, investors would place more confidence and trust in the U.S. markets and financial system.

COMPANY EARNINGS TO TURN THE CORNER

The economy contracted an annualized 5.5 percent in the first quarter of this year, less than previously thought, according to a Commerce Department report last Thursday. And the latest Reuters poll shows the economy is likely to start growing again in the third quarter.

U.S. corporate earnings have still to work their way out of the recession, and second-quarter results are expected to show about a 35 percent decline in S&P 500 company earnings from a year ago, according to Thomson Reuters data.

Results are expected to pick up sharply by the fourth quarter, however, and some strategists say estimates could turn more positive over the coming months.

The best bets for investors now through year-end are the cyclical sectors, which include technology, industrial and other sectors that typically lead markets when the economy begins to recover, several strategists polled said.

Those are the ones that have outperformed since March.

Tobias Levkovich, chief U.S. equity strategist for Citigroup, likes diversified financial, insurance, capital goods, transportation and energy companies, while Ablin of Harris Private Bank favors materials, consumer discretionary and technology.

"The manufacturing sector, the early cyclicals, will prevail for the rest of the year and into next year," said Stanley Nabi, vice chairman at Silvercrest Asset Management Group in New York.

But many said even with a projected annual increase in the S&P, concerns about the extent of the recovery linger.

"The economy has really not turned up," said Carl Birkelbach, chairman and chief executive of Birkelbach Investment Securities in Chicago.

"As far as investors are concerned, they are happy that at least we avoided the Great Depression."

(Additional reporting by Ellis Mnyandu, Chuck Mikolajczak, Leah Schnurr, Ed Krudy, Rodrigo Campos and Jennifer Ablan, editing by Will Waterman)