U.S. stocks are experiencing a "high-risk bull market," with largely unappealing valuations, Bob Doll wrote in his weekly commentary Monday.
"Economic growth is not booming. Although inflation has come down considerably since the reopening spike in 2022, most economies are still generating sticky, above-target inflation. In other words, market trends do not seem to reflect the macro backdrop: Both government bond markets and equity/credit markets appear to be overly optimistic," wrote Doll, the Crossmark Global Investments CEO and chief investment officer.
"Historically, current inflation trends would warrant restrictive monetary conditions rather than the easing cycle over the past year. ... Although U.S. economic growth has cooled this year, primarily in terms of new hiring, the economy is far from recessionary, with continued solid demand growth. Moreover, the main drag on hiring has been trade policy rather than monetary conditions," he wrote.
Doll predicted that the Federal Reserve's new rate-cutting phase probably won't last as long as the market's futures curve suggests.
"We anticipate another up-leg in bond yields that will threaten valuation levels," Doll said. In the meantime, easy monetary conditions will sustain "risk-on" investor sentiment for as long as the bond market stays calm.
Earnings are unlikely to disappoint until a meaningful economic roadblock develops, Doll predicted.
Given both inflationary and unemployment pressures, the Fed’s job has become more difficult, Doll said, noting that the central bank is divided between a “reflective” camp that sees fewer cuts and a “proactive” camp willing to look past tariff-driven inflation and focus on weakening growth. The dot plot, the Fed chart indicating officials' sentiments about the bank's benchmark interest rate, suggests two more cuts this year, he noted.
High-income Americans are spending heavily, driven by the wealth effect on home prices and 401(k) balances, while lower-income consumers are cutting back, Doll wrote.
"Equities now represent more than 30% of households’ total financial assets, a record high. This compares with a peak of 25% in early 2000 at the end of the dot-com bull market," according to Doll.
Courtesy photo. Illustration: Chris Nicholls/Touchpoint Markets
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