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Bob Doll: Stock Market Upside Likely Limited

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U.S. stock market upside appears limited, and valuations may be at risk, Crossmark Global Investments Chief Investment Officer Bob Doll said Monday, noting that companies will likely face a challenge in meeting earnings expectations for next year.

Equities are up 16% year to date, mostly on price-to-earnings expansion, “while real rates and cost of capital are moving deeper into restrictive territory,” Doll noted in his weekly Doll’s Deliberations newsletter.

“History suggests this relationship is becoming increasingly unsustainable, posing risk to the equity multiple, especially since earnings expectations already face a high hurdle for 2024,” he said.

The 15 biggest S&P 500 companies are up 41%, while the median company is up only 3%, Doll said.

Crossmark remains concerned about corporations’ ability to meet “outsized” 2024 earnings growth expectations in the next 12 months, the CIO wrote, noting estimates call for 12% growth in the S&P 500. August was the first month since March 2022 that the three-month average of S&P upward earnings estimate revisions as a percentage of total revisions exceeded 50%, he noted.

“Although global corporate earnings continue to grind higher, equity markets remain hostage to the whims of the bond market, resulting in a choppy stop-start backdrop,” Doll wrote.

“Bond markets remain on edge, testing their cyclical yield highs, yet with the hope that disinflation will intensify and spur a reversal in the policy rate-hiking cycle in 2024,” he added. “We continue to think that inflation will remain sticky, that bonds will tread water at best, and that equity valuations — and perhaps earnings — will remain challenged.”

Expectations for upcoming central bank rate cuts are probably premature, according to Doll, who expects good and bad news in coming months as pandemic-related price and supply distortions unwind and economies continue to re-normalize.

By early 2024, Crossmark expects inflation to remain “well above pre-pandemic readings and central bank targets.”

If bond yields undergo another meaningful up-leg, as Crossmark expects, equities upside should be limited, and the timeline for an eventual recession should come into view, according to Doll, who expects a recession in the next six to 12 months.

Photo: Bloomberg


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