BLACKROCK SEES 2012 MIRACLE: Stocks Will Rise While Earnings Disappoint!

bob doll blackrockBlackRock’s Bob Doll

Photo: CNBC

Last week, BlackRock’s Bob Doll released his 10 Predictions for 2012.Today, Doll released a detailed version of his list, with full commentary and a lot of quantitative forecasts.

BlackRock’s forecasts call for 2-2.5% US GDP growth, while corporate earnings fall short of expectations.

“In 2012, the world will most likely take a middle course that will avoid both the positive and the negative extremes, but also leave a host of critical issues unresolved,” he said. “Nevertheless, this middle course should be good enough to get investors off the sidelines, put their cash to work, and move into higher-risk assets. This bodes well for the stock market.”

Just how good will Doll’s predictions prove to be?

Well, his note also includes a report card of how his 2011 predictions did.  Maybe that will give you a sense of how good he really is.

The European debt crisis begins to ease, even as Europe experiences a recession

' The European debt crisis loomed large and drove high levels of volatility in 2011, causing most risk assets to experience significant downturns. Unfortunately, the debt crisis will continue to dominate risk discussions for 2012 as well. Thankfully, the authorities -- political and monetary -- moved from a position of complacence and inaction to one of irregular, but somewhat constructive action. The ultimate path to a solution is unclear, particularly given the varied interests of multiple countries and constituencies. Formulating incremental fiscal union, creating the enforcement mechanisms for austerity measures, and attempting to generate economic growth are each difficult, and seem impossible when combined. Nevertheless, we believe that all parties recognise the seriousness of the crisis and will continue to take enough action to avoid an outright catastrophe. In any case, however, it seems clear to us that Europe's problems are significant enough to drive the region into a (hopefully mild) recession in 2012. '

Source: BlackRock

The US economy continues to muddle through yet again

Despite slowing growth, China and India contribute more than half of the world's economic growth

' Emerging market economic growth continues to be a critical part of global growth in both the short and long term. China and India are especially important given both their size and growth rates. And while growth in both countries is likely to be slower in 2012 than it was in 2011, together these two countries will account for more than half of 2012 global growth. We expect China will account for more than 40% of global growth, with India and the U.S. accounting for about 15% each. Until recently, increasing inflation in the emerging markets has caused policymakers to raise interest rates and/or reserve requirements in an attempt to slow inflation, with the effort of dampening growth. We expect that process will begin to reverse itself sometime in 2012 '

Source: BlackRock

US earnings grow moderately but fail to exceed estimates for the first time since the Great Recession.

' One of the standouts of 2011 was the performance of corporate earnings. S&P 500 per share profits consistently beat expectations, increasing approximately 14% despite a relatively weak macroeconomic backdrop. This trend of surpassing expectations has been in place since the start of the economic recovery in 2009, but we believe the trend is nearing an end. Our view is that the pace of earnings growth will slow in 2012 and will fail to exceed expectations (currently $108) for the first time this business cycle. Comparisons are getting tougher, the dollar has strengthened somewhat, profit margins are unlikely to climb further, and non-US growth is slowing. All of this points to acceptable, but not stellar, earnings reports. '

Source: BlackRock

Treasury rates rise and quality spreads fall

US equities experience a double-digit percentage return as multiples rise modestly for the first time since the Great Recession

US stocks outperform non-US markets for the third year in a row

' The US stock market has been a standout performer over the last two years compared with other equity markets. In 2011, US stocks were roughly flat and significantly outperformed non-US markets, many of which were down double-digit percentages. With reasonable earnings growth and attractive valuations, we think the United States can outperform again in 2012. That will require modest economic and earnings growth compared with recession in Europe and malaise in Japan. Emerging market underperformance has been significant largely due to monetary tightening stemming from inflation concerns which has resulted in economic slowdown. At some point, perhaps sometime during 2012, emerging market equities will resume outperformance, but we think it is too soon to make that call now '

Source: BlackRock

Dividends and buybacks hit a record high.

' Cash spent by US corporations to raise dividends and buy back stock increased approximately 35% in 2011. Despite that, cash as a percentage of profits used for these purposes is still below long-term averages. As a result, it is possible that the amount of cash used for these purposes grows by another 20% or more in 2012, which would surpass the record dividend increase and share buybacks set in 2007. On a related note, corporations used cash in 2011 for a significant number of acquisitions, an activity that is likely to continue in 2012 given low valuation levels and low cash returns. '

Source: BlackRock

Healthcare and energy outperform utilities and financials

' Our sector preferences include one defensive and one cyclical sector. Healthcare should benefit from continued good and predictable earnings growth coupled with reasonable valuations. Energy is our cyclical choice and is inexpensive relative to its history, the overall market, and oil prices. Financials have been a significant underperformer for several years and at some point may have a rally, but probably not quite yet. Our underweight position stems from continued concerns regarding revenue growth potential, regulatory risks and deteriorating and residual credit concerns. Finally, we believe utilities are overvalued, especially given weak earnings prospects '

Source: BlackRock

Republicans capture the Senate, retain the House and defeat President Obama

' Predicting elections is always treacherous and assessing the impacts is even more precarious. At this stage, our view is there is a strong chance the Republicans retain the House of Representatives while losing a few seats, a reasonable chance they capture the Senate and, while a very different call, win the Presidency. The last part of this prediction is especially difficult given the President's advantage of incumbency and campaign war chest and the uncertainty as to the eventual Republican nominee. Critical to the President's re-election chances are his approval ratings and the unemployment rate, neither of which are currently in his favour. From a markets perspective, we would point out that, historically, equity returns have been strongest under Republican control of Congress regardless of the President's party '

Source: BlackRock

So how did his 2011 predictions fare?

What follows is a review of Bob Doll's 2011 predictions.

US growth accelerates as US real GDP reaches a new all-time high

SCORE = CORRECT

Several months ago it would have been nearly impossible to imagine that this prediction would have come true, but as the year drew to a close it appeared that this did, in fact, come to pass. Growth was at a near-zero stall point in the first quarter of the year and accelerated noticeably each subsequent quarter. At this point, it looks as if the fourth quarter of the year will see GDP growth come in at around 3%. Additionally, on a real basis, GDP did reach a new high in the middle of the year.

Source: BlackRock

The US economy creates 2 million to 3 million jobs in 2011 as unemployment falls to 9%.

SCORE = HALF-CORRECT

Although jobs growth accelerated significantly in 2011 when compared to 2010, this prediction is one we'll have to mark as only half-correct for the year given that the overall pace of growth was less than we had expected. Final numbers will be available in early January, but at this point it looks as if net jobs growth for the year was around 1.5 million. Unemployment did fall below 9% during the course of the year, but remains stubbornly high.

Source: BlackRock

US stocks experience a third year of double-digit percentage returns for the first time in over a decade as corporate earnings reach a new all-time high.

SCORE = HALF-CORRECT

This is another half-correct prediction. As we discussed earlier, earnings surpassed expectations yet again in 2011 and reached a new high in 2011. Regarding the other half of this prediction, equities obviously did not experience double-digit gains, but we are forecasting that they do so in 2012.

Source: BlackRock

Stocks outperform bonds and cash

SCORE = HALF-CORRECT

This prediction came down to the final day of the year since, rather amazingly, the S&P 500 finished the year exactly where it began in point terms, and delivered modestly positive results on a total return basis. Although persistently low interest rates helped bonds outperform stocks in 2011, equities did manage to outperform the 0% return that cash has been delivering.

Source: BlackRock

The US stock market outperforms the MSCI World Index

SCORE = CORRECT

This prediction came true by a wide margin. While US stocks were roughly flat, that was a significantly better result than what happened in non-US markets, many of which were down in double-digit territory.

Source: BlackRock

The United States, Germany and Brazil outperform Japan, Spain and China.

SCORE = CORRECT

Thanks mostly to the relative strength of US stocks, this prediction also came true. Brazil was the worst-performing market of this group, but Germany, Japan, Spain and China all also delivered disappointing market results in 2011.

Source: BlackRock

Commodities and emerging market currencies outperform the dollar, euro and yen.

SCORE = HALF-CORRECT

Commodities were somewhat mixed in 2011, with some areas of the market such as agriculture-related commodities producing negative results. The most visible sectors of the commodities market, oil and gold, were both up for the year and helped the first half of this prediction come true. Emerging markets currencies, however, underperformed for the year.

Source: BlackRock

Strong balance sheets and free cash flow lead to significant increases in dividends, share buybacks, mergers and acquisitions (M&A) and business reinvestment.

SCORE = CORRECT

Despite the relatively weak economy, corporations continued to perform well in 2011, which helped promote high levels of dividend growth, share buybacks, business reinvestment and M&A activity. As we indicated earlier, these are trends that we believe will carry over to 2012 as well.

Source: BlackRock

Investor flows move from bond funds to equity funds.

SCORE = INCORRECT

This is one we were very wrong on. Given the flight-to-quality trade that dominated 2011, bond funds saw greater inflows than did equities.

Source: BlackRock

The 2012 presidential campaign sees a plethora of Republican candidates while President Obama continues to move to the centre.

SCORE = CORRECT

This past year saw a number of GOP candidates announce their intention to run and it has been a relatively crowded field. On the other side, President Obama has been taking a more partisan approach in recent months, but for most of 2011 he adopted a relatively centrist stance.

Source: BlackRock

Another legend is out with his forecasts

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