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Earnings growth to drive share market and miners in 2014

Investors have enjoyed fantastic returns over the last 18 months and despite a number of analysts’ warnings to not expect double-digit returns again in 2014, we have entered the New Year with a high level of optimism.

The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) rose in excess of 15% last year, far exceeding the interest recognised from term deposits or bond yields. Aside from the record low interest rate environment, the US Federal Reserve’s bond-buying program also indirectly contributed to the market’s strength.

However, as economies around the world continue their recovery from the global financial crisis and the Fed begins to taper its stimulus program, it is likely that earnings will play a much more important role in driving the value of shares this year. While this could mean gains aren’t quite as impressive as they have been in recent times, this shouldn’t be an issue for long-term investors.

Australia’s major banks are once again expected to deliver strong profit results this year. When combined, Westpac Banking Corp  (ASX: WBC), Australia and New Zealand Banking Group  (ASX: ANZ), National Australia Bank Ltd.  (ASX: NAB) and Commonwealth Bank of Australia  (ASX: CBA) reported an annual profit of more than $27 billion in 2013, while also paying generous dividends. It is expected that the banks’ profits will increase this year as interest rates and the occurrence of bad debts remain low. However, given the strong share price rallies from the banks over the last 12 months, it is unlikely that they will deliver market-beating returns in the long run.

The miners on the other hand could be in for a stellar year. Australia’s two largest miners, namely BHP Billiton Limited  (ASX: BHP) and Rio Tinto Limited  (ASX: RIO), rose just 1% last year. Fortescue Metals Group Limited  (ASX: FMG) gained around 24% thanks to a strong recovery in the second-half of the year. However, each could have a stronger 2014 on the back of a much higher than expected iron ore price, as well as a lower Australian dollar and reduced operating costs.

Other companies which also generate a large portion of their revenues from foreign markets will also benefit from the lower Aussie dollar. This would include companies such as Cochlear Limited  (ASX: COH) or ResMed (ASX: RMD).

Foolish takeaway

There is no way of knowing what 2014 will have in store for the stock market. It could continue climbing towards 6000 points – as has been suggested by some analysts – or it could even go backwards. However, by investing in quality companies with strong earnings growth potential, long-term investors should continue to benefit.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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