BlackRock's Bob Doll Expects U.S. Equities to "Grind Higher" in 2008'S Second Half, with Help of Global Growth, Stronger Earnings, Moderating Inflation

Business Wire, June 30, 2008

2. The U.S. narrowly escapes an economic recession, but experiences a profits recession.

Our overall view is that while the data continue to point to a fragile U.S. economy that is facing some downside risks, it is nonetheless still growing. The housing market remains a source of significant weakness, with housing starts, building permits and new and existing home sales all declining in recent readings. Consumer confidence also has continued to weaken and the labor market has remained under pressure. There also are some silver linings in the economic picture, however. Manufacturing remains resilient and exports remain an important source of strength. The nonfinancial corporate sector also has continued to perform well. As such, we do not believe that the U.S. economy is headed for recession. From a corporate earnings standpoint, we believe that the second quarter will mark the fourth and last of negative year-over-year comparisons. A turnaround in the earnings environment would help provide an important tailwind for the markets.

3. The fed funds rate falls to 3.5% or lower as Treasury bond yields rise.

All told, the Fed cut the fed funds rate by 225 basis points in the first half of this year to leave the rate at 2.0% by the end of the second quarter. Longer-term yields have traded in a highly volatile fashion over the first couple of quarters. Treasury yields fell sharply during the height of the credit crisis, but have since moved noticeably higher over the last couple of months as the inflation outlook has become more worrisome. As the second quarter winds down, the yield on the 10-year Treasury has climbed back to where it began the year at 4.03%.

4. The dollar rises against the euro, but falls against developing market currencies.

The dollar weakened sharply early in the year as the U.S. economy slowed and as the Fed cut interest rates aggressively. The greenback has been trading in a sideways fashion over the last couple of months, although it has appears to be in a bottoming process rather than entering into a renewed uptrend. From a valuation perspective, we continue to believe that the dollar is oversold (particularly versus the euro), and may enjoy a rally against the euro in the months to come.

5. Stocks achieve a new all-time high in 2008 as price/earnings ratios improve.

Early in the second quarter, stocks moved off their lows from mid March, but in recent weeks the markets have had trouble gaining footing in the face of higher oil prices, worries about inflation, ongoing credit issues and a still weak economy. While it remains to be seen whether prices can climb enough from this point to reach a new high, our outlook for the markets remains a cautiously optimistic one. The outlook for nonfinancial sector profits is stable, and the weak dollar and relatively firm demand abroad is helping to strengthen the overseas earnings of U.S. companies. The corporate sector's heightened efforts to streamline labor costs and improve productivity in this environment are also a positive for profitability. In sum, we believe the longer-term outlook for stocks remains rocky, but is generally positive.