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Doll: High-Single Digits Doable for Earnings and the Market

Jeremy Glaser

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Bob Doll. He's a senior portfolio manager and also the chief equity strategist at Nuveen Asset Management. We're going to look at corporate earnings and how it could impact the stock market.

Bob, thanks as always for joining me.

Bob Doll: Thank you, Jeremy.

Glaser: So, we have a lot of the blue-chip earnings that have already come out. How do you characterize this earnings season so far?

Doll: Good. Not great, but good enough. You have revenue growth that has been this much and operating earnings this much and earnings per share this much. And all of a sudden, you're up to an eight number, which given the environment is not all that bad.

Glaser: But we have seen some pretty high-profile misses: McDonald's (MCD), Coca-Cola (KO), and Amazon (AMZN) amongst others. How do you think about that? Is that a sign that there is a softening of the consumer?

Doll: Softening? I don't know. I do have three companies you just mentioned that are in front of the consumer, so you have to ask the question. Look, I think consumers have had some issues because how many new jobs have there been? The absence of real wage gains. My hope is, as job growth has picked up, as oil prices have fallen, as interest rates are falling yet another notch, all that is a tailwind for the consumer even if they don't get a raise. So, I think the consumer is going to be OK.

Glaser: So, what's your outlook for earnings then over the next, say, year or so? Can this high-single-digit growth continue or there are going to be more headwinds?

Doll: I think it can. And, again, how do we build that? It's a revenue number that's kind of mid-single digits; it's a couple of more points for operating growth as margins continue to strengthen a bit. And then the buybacks put another point or two on it, and then all of a sudden, you get earnings per share that's high single digits, which I think is what we should expect out of the market. You can't ask for a lot more in P/Es. So, if the market can follow earnings, the stock market will be fine. Not great, but good enough.

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Glaser: So, I guess that brings us to valuation then. These earnings, then, support where we are right now? You think that valuations are reasonable?

Doll: I think they are, particularly relative to the alternatives. Valuations always, as you know, are relative to your other choices. And when cash is returning zero and bonds, we know what that return is; it's not a very big coupon. Therefore, stocks should have a high P/E, and they do. And I think that's appropriate.

Glaser: What are some of the key risks to that, then, if you think the bull market is not about to get derailed?

Doll: The key risk is the subject we are on: Is there enough nominal growth--real growth plus inflation--for revenue growth to be strong enough for corporations to generate the earnings? I think that's the big one. I'm less concerned about it here in the U.S., more concerned in Europe--and, of course, Europe's pretty important to the U.S.

Glaser: But what would, say, deflation in Europe or this continued very slow growth in Europe mean for corporate earnings in the U.S.?

Doll: I think if it's just continued slow growth, the fact that only about 13% of our economy is exports means that we get nicked very little. We estimate it actually takes about 0.5% off the earnings per share of the S&P 500. For some companies, that mean something. Overall, not a very big deal. The question is, does it lead to financial disconnects, where the financial system begins to fray. I think we're a long way away from that, given how low rates are.

Glaser: And you're not worried about any of the geopolitical risks, those kinds of topics that have been talked about?

Doll: Much less so, Jeremy. I think the stock market has said, "Does this geopolitical issue staring me in the face impede corporate America's ability to grow its earnings?" And the market is so far rightly going say, "Well, no. Not really." And then the market begins to grind higher, and I think that's probably where we are.

Glaser: Finally, then, no worries about the Fed, about tightening rates potentially next year being a big problem?

Doll: I think the Fed will drag its feet as long as it can. Remember, they invested their careers, as it were, into avoiding deflation and depression and, therefore, they're not going to turn around and risk it on the other side. So, I think they will be slow. They will follow the curve up. You and I will know when the Fed's going to raise rates because the curve will tell us so.

Glaser: So, it sounds like, for you, equities are still the place to be.

Doll: I think they are, recognizing the fact that the kinds of gains we're going to see in the future aren't what we've enjoyed bull market to date.

Glaser: Well, I always appreciate your insights.

Doll: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.