Stock market continues climb, but ride could get bumpier: Bob Doll

'I can't say it enough. Inflation is the key issue,' said Doll, who's chief investment officer at Crossmark Global Investments.

Price-earnings ratios have rarely been stronger and company profit margins have never been higher, but the stock market still has room to climb, a popular market analyst said Monday.

“The path of least resistance continues to be up, but the easy money has been made,” Bob Doll, chief investment officer at Crossmark Global Investments, told the audience at the InvestmentNews Retirement Income Summit in Naples, Florida. “Returns are likely to be bumpier.”

The factors catalyzing market expansion include above-trend economic and earnings growth, a “pedal to the metal” approach to fiscal policy in Congress and an accommodative monetary policy by the Federal Reserve that have kept interest rates low. When it comes to investing in the financial markets, Doll referred to the acronym TINA — there is no alternative.

But the market ride could hit some turbulence thanks to inflation. For the past few months, many economists, politicians and other observers have stressed that inflation will be “transitory.” But Doll pointed out that fuel and grocery prices are rising, as are wages, constituting an increase in core inflation.

“This is my biggest concern,” said Doll, a former strategist at Nuveen who is best known his annual 10 predictions for the financial markets and the economy. “I can’t say it enough. Inflation is the key issue.”

Other “creeping concerns” that Doll outlined include the Fed becoming more bearish as it tries to contain inflation; the “fiscal circus” in Washington as Democrats try to pass the now $1.75 trillion tax and spending package, the Build Back Better Act; and the fact that earnings growth, although high, is slowing.

Doll stressed that for the fourth quarter, stocks are a better investment than cash, which is better than bonds. He also said that value stocks should outperform growth stocks and cyclicals should beat “defensives.”

Politics also could affect the fourth-quarter markets. Last week, the White House released a framework for Build Back Better that jettisoned individual and capital gains tax increases for high earners, as well as many previous provisions to generate tax revenue by clamping down on so-called mega individual retirement accounts and restricting Roth conversions.

Instead, the White House framework includes a 15% minimum corporate tax and income tax surcharges on annual income in excess of $10 million.

“The tax impact of Build Back Better is pretty small for most companies,” Doll said in an interview on the sidelines of the conference. “That’s why the markets have breathed a sigh of relief.”

Congressional Democrats have been trying to reach an agreement between their progressive and moderate members on the measure, which incorporates an array of social and climate spending, as well as tax increases to pay for them. All 50 Democrats must support the measure in order for it to pass the evenly divided Senate, while the party only has a three-seat margin in the House.

“I’ve never seen a party with so many disparate factions,” Doll said, while noting that Republicans are sitting on the sidelines opposed to the bill.

The Build Back Better legislation may be President Joe Biden’s last chance to influence economic policy, Doll said. A key indicator of Democrats’ chances to hold their narrow majorities in the House and Senate in next year’s mid-term election is the outcome of Tuesday’s gubernatorial race in Virginia, where former Democratic Gov. Terry McAuliffe is taking on Republican Glenn Youngkin, a former private equity executive.

“If Glenn Youngkin, the Republican, does win a blue state … the Democrats almost certainly will lose the House and possibly the Senate,” Doll said.