Earlier this week we had two Canadian reports on stock market expectations for 2010 – what sectors should outperform in 2010 compared to the stock market highs in 2007 – as well as which Canadian equities are expected to do well in 2010.

Top 10 Canadian Dividend-Paying Multinationals

Best Sectors To Invest In for 2010

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Frances Horodelski reported for BNN that, when we compare current estimates on sector profitability in 2010 to sector profitability in 2007 (at the stock market peaks in October 2007), five sectors stand out for their probability of generating the most increase in profitability relative to their former highs.

Based on the quarterly earnings in the S&P 500 from 2005 through 2009, peak profitability occurred in the third quarter of 2007.  Over the upcoming year, the following sectors’ profitability growth is expected to surpass the profitability they saw in 2007 (the percentages refer to the amount of increase expected over their 2007 highs):

Consumer Discretionary – Up 7%

In this category, think of stocks that provide consumer goods that are not as necessary to daily living, but which can garner the premiums of more luxury and surplus spending.   Think Home Depot (NYSE: HD), Lowe’s (NYSE: LOW), and Bed, Bath and Beyond (NSDQ: BBBY).

Utilities – Up 11%

Utilities have something in common with consumer staples – you can’t give up on them, even in a recession.  Look at the pipelines, electricity and other power companies.  Think Exelon Corp (NYSE: EXC), Southern Co. (NYSE: SO), and Duke Energy (NYSE: DUK).

Consumer Staples – Up 24%

The items you literally can’t live without.  Could these companies go bankrupt?  Theoretically, yes – but not because of a lack of demand.  Think about Kraft (NYSE: KFT), Proctor & Gamble (NYSE: PG), Walgreen’s (NYSE: WAG), Johnson & Johnson (NYSE: JNJ).

Info Technology – Up 24%

Invest in what you understand – and likely you’ll have no hard time understanding the services IT companies provide.  Microsoft (NSDQ: MSFT)? Check. Intel (NSDQ: INTC)? Check. Dell (NSDQ: DELL)? Check.  One stock getting more attention lately is Cisco (NSDQ: CSCO).  You don’t have to chase the Apples (NSDQ: AAPL) and Googles (NSDQ: GOOG) to find some good returns.

Healthcare – Up 32%

With an aging populus, but also improved medical technologies, it’s no wonder healthcare is expected to outperform in 2010.  In fact, I’d say healthcare is going to be a top performer over the next decade as well.  There will be real growth and innovation in this sector as it will be one of the fastest growing market niches as well.  Look at stocks like Abbott Laboratories (NYSE: ABT), Pfizer (NYSE: PFE), and Merck (NYSE: MRK).

Currently, each of these sectors are still “underwater” relative to their 2007 peaks, but this is expected to change over the course of 2010.

TD Waterhouse Economic Forecast

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Bob Gorman, VP of TD Waterhouse (Canada) believes that equities will continue to be the place to be in 2010 – not bonds.  Although we’ve had a large run-up in equities in 2009, he notes that stocks are only now back at fair value levels.  Going forward into 2010 Gorman sees more modest growth to come.

Outlook For Canadian Stocks in 2010

Rotation of Market Leadership.

The stocks that were most volatile and hurt most in the downturn are the ones that pop back up first.  Now that that’s happened, we need to look to the second and third tiers of stocks for growth opportunities.  This is why some have been turning back to consumer staples stocks lately, like Shoppers Drug Mart (TSX: SC).

Gorman thinks we’ll see value and dividend stocks in particular come more into favour in 2010 – look at consumer staples, for example.  (And on this point, Gorman echoes Horodelski’s report, too).  South of the border, Gorman cites companies like Pepsi-Co (NYSE: PEP), but also utilities and telcos.  In Canada, look at BCE (TSX: BCE) and Shaw Communications (TSX: SJR.B).

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So, if you’re looking for some new stock ideas (to fit into the existing research you’ve already done, of course! – these aren’t “hot stock” tips) – consider looking at names that fit into both of these forecasts.  Combine these with other forecasts you’ve read about and see what overlaps.  I’m thinking any staples stocks that relate to health care might be really good options.

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