The S&P 500 should gain an additional 6.6 percent this year to begin a decade of 8 percent annual returns as concerns of a return to recession prove unfounded, BlackRock Inc. Vice Chairman Robert Doll said today.
“There’s opportunity for that as double-dip fears continue to recede, and we get a little more clarity to the significant political uncertainties that exist in the U.S.,” said Doll, whose company oversees $3.4 trillion and is the world’s largest asset manager.
The risk of a new recession has fallen to as little as 10 percent, down from 20 percent at the beginning of the month, Doll said before an address to the Toronto CFA Society Annual Forecast Dinner. The stock market has priced in concerns the U.S. economy will slide back into recession, which is at odds with what is happening in the real economy, he said in the address.
U.S. economic data has been “less bad” than expected, Doll said. He cited today’s reports on existing-home sales and the U.S. Conference Board’s index of leading economic indicators, both of which exceeded most economists’ forecasts.
As in previous recoveries, stimulus policies have been followed by improving demand, he said. Job growth should be next to follow.
“The economic recovery is becoming self-sustaining,” Doll said. “This recovery is behaving like most of them do. When I talk to corporate CEOs or CFOs, they’re not bullish, but I get a very different picture.”
U.S. consumers have not retreated into a long period of deleveraging as some feared, Doll said.
“The U.S. consumer got tired of that real fast, came running out and went straight to the mall,” he said.
Even if the recovery remains slow, stock-market returns should exceed economic growth, Doll said. Forty percent of S&P 500 companies’ revenue comes from outside of the U.S. Only 15 percent of their earnings are derived from U.S. consumers’ discretionary spending, he said.
U.S. companies are well-positioned to increase profits in a slow-growth environment due to cost reductions they made during the downturn, Doll said.
“Given how scared corporations got and how much they cut costs, that has created an immense opportunity for earnings,” he said.
The S&P 500 has surged 7.2 percent this month after falling 5.9 percent in the first eight months of the year.
S&P 500 earnings are likely to increase 8.4 percent next year, he said.
The political situation in Washington is a potential setback, Doll said. Before the speech, he estimated that failure to extend tax cuts set to expire at the end of the year would reduce economic growth by more than 1 percentage point.
The election of a new Congress that likely will be less enthusiastic about regulation would be positive for U.S. business, he said.
During the decade beginning 2010, the S&P 500 should increase 6.2 percent a year, returning 8.1 percent a year with dividends, Doll said, with healthcare, technology and alternative-energy stocks performing best. Emerging markets should exceed those returns, while demographic pressures will hamper the European and Japanese markets, he said.
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