Stock markets rebounded strongly in 2009, but there’s still room for equities to head higher in the year ahead, suggest analysts at National Bank Financial.

In a research note, NBF analysts indicate that while 2009 was a good year for stocks, with global equities returning 27.8%, “the indices remain on a strong footing early in the New Year.”

“Economic data released in the past 10 days remain very supportive of a continued uptrend, implying that the rally will become increasingly driven by better earnings growth,” NBF says says, adding that this is an important development as it will help keep valuations at relatively attractive levels.

The firm observes that current PE ratios of 14.6 times 2010 earnings in the United States, and 14.8 times in Canada, “remain well below the multiple of around 16 that is generally observed one year after the end of a recession.”

“In our opinion, the improving economic backdrop combined with the reticence of central banks to commit to an early exit strategy remain conducive for a redeployment of sidelined cash into riskier assets or the real economy,” it says.

“We see a 15% upside for the S&P 500 and about 10% for S&P/TSX over the coming year,” the report says. “In sector rotation, we continue to recommend overweighting the resources, IT and consumer discretionary.”

IE