Equities Look Good for 2010

Speaking at a press briefing in New York City yesterday, John Linehan, co-director of U.S. Equities at T. Rowe Price, expressed modest optimism for the stock market. There is a lot of cash on the sidelines that will come into the equity market, which could be “significant fuel” for a market rally, he said.

He also noted that, as corporations have cut costs dramatically, earnings are looking good. However, Linehan noted that although the earnings growth might be comforting, it is coming from cost-cutting and not revenue growth. “Over time, it’s going to be revenue growth that causes earnings growth,” he said.

The U.S. stock market is in better shape than the economy, partly because many U.S. companies are growing outside of the U.S. However, for long-term sustainability in the equity market “we’re going to need durable economic growth,” Linehan said.

But don’t forget the power of the U.S. consumer. “Rumors of the demise of the U.S. consumer have been greatly exaggerated,” he said. He said not to underestimate the wealth effect; as wealth comes back, the affluent customer will spend more.

That tendency to spend when wealth is restored will also be evident in a lower savings rate. The savings rate will likely be corrected, going back down to around 3% in 2010, after shooting up to above 5%, according to Alan D. Levenson, chief economist at T. Rowe Price.

Despite the deep recession, Levenson forecasts sluggish growth for the economy next year (about a 2% rise in GDP). He also said he is more concerned about inflation than the consensus view.

It’s not totally clear in most market outlooks what will happen in 2010, but forecasts seem to be positive about the market and hopeful for economic growth—albeit slow. “The only thing I can give you with any degree of certainly is to expect the unexpected,” said Linehan.