Bank of America strategists: S&P 500 to climb 20 per cent

Get ready for the sequel to the summer rally—a year-long, full-blown bull market.

David Bianco, chief U.S. equity strategist at Bank of America (nyse: BAC) Merrill Lynch says the S&P 500 will hit 1,200 in the next 12 months, up another 20% from its current level to 17 times earnings for next year and 15 times earnings for 2011. Leading sectors will be financials, energy, technology and consumer staples, though there will be some risky opportunities in health care and utilities, say Bianco and his team.

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"The valuation thesis is that 2009 just doesn't matter," says Bianco. "It was a horrendous recession. It's over. What matters is how earnings recover in 2010 and 2011."

The optimistic forecast calls for growth in corporate earnings to outpace the recovery in the broader economy. Unemployment will max out at 10.25% in mid-2010, and there won't be a notable amount of good jobs created until months after that. As was seen so far in 2009, increased productivity from America's remaining workforce will continue to drive earnings per share.

Investors seeking recovery returns can take the simple route and try a low-cost S&P 500 index mutual fund or exchange-traded fund, a simple strategy that Bianco says "isn't such a bad idea. The big question is if you want to be in stocks or not, and at this point I think you do."

Still, he says, some sector plays can enhance returns: "For the first time in a long time, we're comfortable recommending financials."

Ironically, that's because the economic recovery will be so tepid. The Federal Reserve will be forced to keep interest rates low well into 2010 and possibly thereafter. With interest rates at historic lows and a hefty hand from Uncle Sam as well, banks like Goldman Sachs (nyse: GS) and JPMorgan Chase (nyse: JPM) have already reported stunning earnings results just by exploiting the Fed-given carry trade. Next year, analysts expect laggards like Morgan Stanley (nyse: MS) and even Citigroup (nyse: C) to start booking profits.

While we experience the slow recovery in the U.S., emerging-market economies will continue to grow, adding to the world's demand for crude oil, which has already recovered nicely to around US$71 a barrel, a price that the Organization of Petroleum Exporting Nations would like to set as a floor. Big oil companies like ExxonMobil (nyse: XOM) (the world's biggest) should benefit from that, as will domestic refiners who will see a reasonable increase in demand for gas as well as margins growing off the 2009 lows. The rise in oil prices will extend to other commodities prices as well. If Boeing (nyse: BA) can get its Dreamliner back on track, that's a company to watch.

Yes, commodities inflation and emerging-markets performance will weaken the dollar, but Bianco says not to panic about it. "The weaker the dollar, the stronger the profits of the S&P 500 [which contains a lot of global exporting companies]. Though you don't want the dollar to be in freefall of course."

Finally, look out for big, global technology players like IBM (nyse: IBM) and Hewlett-Packard Company (nyse: HPQ)—big companies with products that span hardware, software networking and consulting. Not only will they do well as the U.S. economy recovers, they're the technology companies with the best chance at delivering some returns from the rest of the world.

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