The Standard & Poor's 500 and MSCI EAFE indexes will each rise in the range of 8% to 12% this year, and the U.S. market is less likely to underperform than the international market, Robert C. Doll, global CIO-equities of BlackRock, predicted today in a teleconference.
High-quality large-cap stocks will outperform lower-quality small-cap stocks in the U.S. this year, and therefore, most stocks will underperform broad market indexes, he said. "Stock picking will become even more crucial to beating the benchmark." Mr. Doll favors the energy, health-care and technology sectors in 2007 and expects the telecommunications, utilities and consumer staples sectors to underperform.
Mr. Doll based his outlook on a soft landing for the slowing economy and continued low inflation. Without those two factors, he said, he would expect weaker market performance.
The Fed will lower the funds target rate to a 4.5% to 4.75% range by year's end, he predicted, down from the current 5.25%. He also expects 10-year Treasury bonds to yield 5% to 5.25% by year's end, up from 4.71%. Earnings growth will slow to about 5% this year, he said, down from the double-digit levels they have recorded every year since 2001.
Stock market volatility will increase this year, he forecast. Potential sources of volatility are geopolitical disruptions from terrorism or other events, and populist sentiment in Congress, which might raise minimum wages, taxes on high-income earners, dividends and capital gains, and might move away from free trade and toward protectionism, he added.