Despite all of these long-term positives, the current equity rally seems tentative, and we remain cautious about the near-term market outlook. For one, we think much of the recent rally can be attributed to the rebound in oil prices. It appears to us that the oil price advance came about largely as a result of expectations of falling supplies, which have not yet materialized. By their nature, oil prices are volatile and it seems inevitable that we will see another correction at some point. If and when that happens, that could cause another sell-off in risk assets.
Additionally, corporate earnings may continue to struggle for some time. Current consensus forecasts point to flat earnings-per-share growth this year versus 2015.5 And it is tough to make an argument for stronger equity markets without first seeing improvements in earnings.
So given all of these crosscurrents, where does that leave investors? Over time, we think improving economic growth, still-low interest rates, low inflation and a more stable dollar should be positives for corporate earnings and ultimately for equity prices. This process may take several months to materialize, however. For now, we think investors should continue to watch for signposts such as improvements in manufacturing data and global trade, signs of oil prices stabilizing into a trading range and ongoing strength in the labor market as indicators for a longer-term equity uptrend.
1 Source: Morningstar Direct, as of 3/24/16
2 Source: Institute for Supply Management
3 Source: Federal Reserve
4 Source: Bureau of Labor Statistics
5 Source: Bloomberg
Bob Doll is chief equity strategist at Nuveen Asset Management.