Miller: Financials will drive S&P 500 in 2011

Financial stocks could deliver over 25% of the earnings growth of America's leading index over the next 12 months, says Bill Miller, the chairman of Legg Mason Capital Management.

The manager of the $4bn Value Trust says the financial sector will be a key driver of incremental earnings growth in 2011 because US large caps cut costs aggressively during the financial crisis.

"To date, both cost cutting and revenue growth have contributed to earnings which have continued to beat expectations this year," Miller says.

"The direction of the market is highly correlated with the direction of earnings. Consensus expectations for the next two years are still comfortably positive."

The manager expects the S&P 500 to rise as much as 15% this year, he adds.

Financial stocks are Miller's largest overweight sector position within the Value Trust. He says they are trading at historically cheap levels owing to the uncertainty surrounding recent financial regulation.

He believes financials represent one of the most attractive sectors in the market based on price/book ratio and normalised earnings power basis, and adds financials may begin to restore their dividend payouts in early 2011.

"Within the financial sector, consensus expectations for 2011 earnings growth versus. 2010 imply four financial companies will drive over half the growth for the sector. These include J.P. Morgan, Wells Fargo, Citigroup, and Bank of America," he says.

"We find it very puzzling that so many fund managers agree that financials are undervalued and yet continue to hold them as underweight positions."