Earnings, M&A flashing green for stocks, Ukraine not a worry

Nuveen's Bob Doll says weakness may be an overhang, but fundamentals appear intact

Feb 25, 2014 @ 12:01 am

By Robert C. Doll

earnings, M&A, stocks, market, ukraine
+ Zoom
(Bloomberg News)

Weaker-than-expected economic data has not accelerated fears about the recovery slowdown that weighed on stocks in late January and early February. The recent reprieve has primarily been due to extremely adverse weather that will probably distort the data over the near term. Softer activity data is anticipated to continue and can be seen as a greater-than-expected payback for the strong inventory and capex in the second half of last year.

Our view is that the economic expansion is mid-cycle, marked by a time of stationary growth expectations. We think more emphasis should be placed on where the economy is in the business cycle, rather than simply trying to anticipate GDP growth for next quarter.


The earnings per share growth rate of more than 8% for the fourth quarter has been strong. Approximately 90% of the S&P 500 companies have now reported earnings. Top and bottom line growth trends are positive and support our forecast for growth acceleration in 2014. The S&P 500 appears to have broken out of the nearly flat revenue per share growth that stretched for five quarters during 2012 and 2013, and earnings per share has followed suit.

Ukraine should not cause financial or economic contagion because of its smaller relative size in the broader global economy and markets. The country has been mismanaged for so long that it is unlikely to be a catalyst for global risk. The only concern would be if Ukraine becomes a venue for new confrontation between Russia and the West.

The anticipated M&A boom could begin. Favorable signals include recession-like nominal GDP, vast cash reserves on corporate balance sheets and a growing activist investor base.


After several weeks of a risk-off environment, conditions have been less negative but remain choppy. The overall backdrop in the developed world is unchanged, despite abnormal weather resulting in lackluster economic data in the U.S. and weakness in parts of Europe.

We maintain a relatively upbeat economic and earnings forecast for the developed world, based on trends in leading economic indicators, hiring plans and profits. This assumption, combined with pro-growth central banks in the major economies, leads to our cyclically positive stance on equities and negative outlook for bonds, as well as a mildly positive view for the U.S. dollar.

The Great Recession resulted in substantial spare capacity in global product and labor markets that has not yet been absorbed because of the subdued economic recovery in recent years. The key to ensuring a successful transition to a more sustainable economic expansion and higher earnings conviction is for central banks to avoid pulling away the punch bowl prematurely. Outside of a handful of troubled emerging market nations, no major country has taken steps to increase interest rates nor encouraged a stronger currency. The Fed, the European Central Bank, the Bank of Japan and the Bank of England are all determined to lag the economic recovery, which bodes well for equities but negatively for bonds.

Forward P/E multiples in the U.S. have expanded by more than 25% over the last two years, and earnings growth must now justify this expansion. The good news is that a turning point in profitability seems to have arrived. The bad news is that the loss of momentum in many economic indicators could present an obstacle to the earnings recovery. It may take until the spring thaw to ascertain the pace of the confusing economy and markets.

Robert C. Doll is chief equity strategist and senior portfolio manager at Nuveen Asset Management.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Sep 26


Investing 2017: Industry at a Crossroads

The advice industry is at a unique inflection point, as the way clients are investing has changed dramatically: Technology has evolved, access to innovative products has changed, and the active vs. passive debate continues to rage on. Advisers... Learn more

Featured video


Vanguard's Joe Davis: Prepare for lower expected returns

The next five years will be more challenging for the markets than the past five, according to Joe Davis, global chief economist at Vanguard. Here's why it's more important than ever to stay reasonable with return expectations and stick to the plan.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Video Spotlight

Path to growth

Video Spotlight

Path to growth

Latest news & opinion

What not to say to clients when the markets drop

Here's what advisers should steer clear of saying the next time stocks turn downward.

SEC bars former rep for alleged share price manipulation

George Thoreson tried to keep penny stock's price high to enable Nasdaq listing.

Nevada fiduciary law raises concerns among retirement professionals, brokerage industry

Critics complain that it conflicts with ERISA and SEC rules and has potential to spur other states to pass their own version of a fiduciary rule.

A special need for financial advice

Advisers don't have to be experts to help special needs families get a jump on lifelong planning.

Broker-dealers and RIAs at loggerheads over fiduciary rule delay

Companies and groups weighing in with comment letters have vastly different viewpoints on the delay's potential impact.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print