Eighty percent of fund managers expect the stock market to continue to rise in 2010, fueled by real corporate earnings growth, rather than aggressive cost-cutting, Russell Investments found.

“The managers believe U.S. equity markets can continue to move up from here in 2010,” said Mark Eibel, director of client investment strategies at Russell. “The managers are tentatively hopeful that earnings, driven by increased revenues and [supported] with continued monetary and fiscal policy—rather than cost-cutting [or cheap stock prices]—can become the main drivers for economic recovery and the market.”

However, only 19% believe stocks are currently undervalued, a survey low. A year ago, 72% believed the markets were bargains.

“The managers’ enthusiasm for the markets is no longer based on undervaluation, but on the hope that the hand-off from cost-cutting to real economic growth has begun,” Eibel added. “How real this shift is and how long it lasts remain open questions dependent on macroeconomic factors such as unemployment and housing.

“If the economy continues to heal, many companies could see expanded revenues placed on top of corporate structures that have become very efficient and streamlined,” he added. “That combination would prove to be a real win-win for the markets.”

Perhaps telling for the impetus of the markets in 2010, 72% of large-cap managers at the end of 2009 were bullish on the market, up from 55% at the end of the previous quarter. By comparison, 54% of small-cap managers were bullish, down from 57%. Meanwhile, enthusiasm for corporate bonds fell from 44% at the end of the third quarter to 27%.

Among sectors, many managers expressed the most enthusiasm for technology, followed by energy, materials, processing, consumer staples, consumer discretionary and utilities.