Bob Doll Checks In on His 10 Predictions for 2023

The stock market is in a "high-risk bull phase" now, with several positive and potential negative drivers, Crossmark Global Investments Chief Investment Officer Bob Doll said during a midyear outlook webcast Wednesday. "We think the path of least resistance at the current moment is to the upside," he said. Doll noted that half of his 10 predictions for 2023 appear to be headed in the right direction, while two are heading in the wrong direction and likely incorrect and three are too soon or too close to call. Potential upside stock market and economic forces include investor fear of missing out, decent second-quarter earnings, improved inflation numbers, optimism about artificial intelligence, looser financial conditions, and large cash stashes on the sidelines, according to the CIO. Among the risks are fundamental indicators that remain "pretty precautionary," he said, noting a downward trend in the Leading Economic Index for 14 straight months. Other potential risks include lagged effects of the Federal Reserve raising interest rates from 0% to 5% over 13 months, the likelihood that the Fed isn't done raising rates, stubborn core inflation, the inverted yield curve, negative money supply growth, slowing in bank lending, high stock valuations and narrowness in the market rally, he said. Lagging performance in small-cap and bank stocks relative to the S&P 500 are concerning trends for a potential market downturn, according to Doll, who also said stocks tend to decline after unemployment lows like the U.S. economy is experiencing now. Corporate profit estimates remain too high, he said. While a recession hasn't come to pass, Doll expects a mild one to materialize sometime between Labor Day and year-end. Without a recession this year, the S&P 500 should end 2023 at Crossmark's 4,200 target, he said. A normal recession is inevitable if the Fed insists on wrestling inflation back to 2%, but if the central bank is willing to tolerate 3% or 4% inflation, the economy may achieve a soft landing, he said. Consumer cash, strong corporate balance sheets and a sound banking system should support a soft landing or mild recession, not a deep economic downturn, he said. Although underweight stocks overall, Doll is participating in the market, owning the seven "super" stocks that have driven strong S&P 500 returns so far this year; he said he's holding his nose in terms of valuation. "If the market's going up, you've got to have some money in the market," he said, adding that trying to call market tops and bottoms is a fool's game. Doll said he wants to participate because the bull phase isn't over. Stocks are either experiencing the strongest bear market rally ever or the weakest start to a bull market, Doll said. The October stock market low reflected Fed hawkishness; if a recession occurs, equities may experience a new low, he said in slides accompanying the webcast. Doll suggested that investors:

• Expect choppy markets, buying on dips and trimming on rallies
• Own some bonds
• Diversify across asset classes and regions, with more non-U.S. securities
• Focus on free cash flow and high predictability in earnings
• Own high quality value and less expensive growth stocks
• Consider an absolute return strategy to complement exposures
• Avoid extreme positions

Check the gallery for Doll's update on his 10 predictions for 2023, including his explanations for why they may or may not materialize.