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

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

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


Dynasty's Penney: Top RIA trends for 2018

What's next for RIAs? Dynasty's Shirl Penney talks about the growing numbers of entrepreneurial advisers. Plus, what inspired his own entrepreneurship.

Latest news & opinion

Nontraded REITs to post worst sales since 2002

The industry is on track to raise just $4.4 billion, well off the $19.6 billion it raised just four years ago, as new regulations hinder sales.

Broker protocol for recruiting a boon for clients

New research finds advisers whose firms have joined the agreement take better care of customers.

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print