Economic Optimism Keeps Street Bullish on 2013

The New Year started off with a bang for the equity markets, as investors breathed a sigh of relief that Washington reached a deal on taxes to avert going off the "fiscal cliff" and as new money poured into the market.

After a 13 percent gain for the S&P 500 in 2012, strategists generally remain bullish on equities this year on expectations the economy continues to improve.

A rebounding U.S. economy supports the case for equities in 2013, John Stoltzfus, Oppenheimer chief investment strategist, told CNBC this week. He ticked off a list of positives, including housing, auto sales, manufacturing, services and "decidedly supportive" monetary policy that make the current economic recovery "likely quite sustainable."

A tepid jobs report with 7.8 percent unemployment may also support ongoing Federal Reserve stimulus, despite minutes from the December meeting suggesting some members of the policy setting committee are growing concerned about the impact the massive $2.9 trillion Fed balance sheet could have on financial markets.

Averting a massive tax hike on most Americans should also help economic activity, Ed Yardeni, president of Yardeni Research, said. "I think we can look forward to the economy actually doing surprisingly well, not just on a relief rally in the stock market, but a relief rally in consumer confidence and spending," he said.

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With Wall Street more optimistic about economic growth this year, strategists are recommending economically sensitive cyclicals.

Raymond James' chief investment strategist Jeffrey Saut expects the economic recovery to continue in 2013 and warned about getting too bearish. He favors the technology, consumer discretionary and financial sectors. "I like most of the sectors except consumer staples because they look expensive and portfolio managers were hiding out in them worried about the fiscal cliff, euro quake, etc.," he told CNBC.

Oppenheimer's Stolzfus is also bullish on techs and financials, but includes industrials and materials among his favorite sectors.

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Stretching down the market cap scale may also continue to be a good strategy even after small and midcap equities made new highs this week. Saut expects their run to continue. "If this is the start of a new secular bull market, the small and midcaps tend to outperform and you should have an overweight in both those areas," the strategist advised.

Among his favorite stock are regional bank Huntington Bancshares, health care firm DaVita and cell tower company American Tower.

When investing in cyclically exposed stocks, Stoltzfus recommends looking for dividends. His top picks for 2013 include industrial giant Honeywell, home improvement retailers Home Depot and Lowe's, refiner HollyFrontier and tax prep company H&R Block.