Dec 18 J.P. Morgan Securities said it expects the "great recession" of 2008 to end by the second half of 2009 and views discretionary and financials as drivers of earnings growth in the next year.
Investors are likely to approach 2009 with a more bullish tilt given the expected continuation of the December rally, JP Morgan's chief U.S. strategist Thomas Lee wrote in a note to clients.
"With the record cash on sidelines, positive expectations from an Obama administration, and a potential mid-2009 economic recovery, we see investors buying stocks in early 2009," Lee said.
An economic recovery will spur risk appetite, reversing extreme risk aversion, he added.
Financials and discretionary are expected to have incrementally better fundamentals relative to the S&P 500, according to the strategist, while resources and exporters are seen reversing to earnings drag from drivers in 2009.
The brokerage believes the U.S. Federal Reserve's and Treasury's actions, lower gasoline prices, lower mortgage rates, $700 billion to $1 trillion in fiscal stimulus, and a possible auto sales recovery in the second half of 2009 will almost certainly do something for the economy.
The world's largest economy has been hit from rising loan defaults and foreclosures in the face of reduced consumer spending and poor liquidity in the credit markets.
The strategist called the 2008 recession "challenging," and said "we believe the greatest policy mistake in 2008 was allowing Lehman Brothers to fail.
A further failure in a financial company is less likely now that policy makers see the importance of the "lender of last resort" function, Lee said.
Some potential areas of further weakness are a large industrial company failure, a large, tentacled hedge fund failure, a large foreign company defaulting, or even a large emerging market nation, the strategist added.
Several financial companies have had to file for bankruptcy or seek government aid as they struggle to keep themselves afloat amid the financial crisis.
Lee, however, forecast 2009 to be an earnings trough for the S&P 500, with a strong rebound seen in 2010.
He said any equity rally over the next few months is likely to fail unless it is confirmed by a broad improvement in the credit market.
(Reporting by Sweta Singh in Bangalore; Editing by Vinu Pilakkott, Dinesh Nair)