Bob Doll: Stock Market Upside Likely Limited

U.S. stock market upside appears limited, and valuations may be at risk, Crossmark Global Investments Chief Investment Officer Bob Doll said Monday, noting that companies will likely face a challenge in meeting earnings expectations for next year.

Equities are up 16% year to date, mostly on price-to-earnings expansion, “while real rates and cost of capital are moving deeper into restrictive territory,” Doll noted in his weekly Doll’s Deliberations newsletter.

“History suggests this relationship is becoming increasingly unsustainable, posing risk to the equity multiple, especially since earnings expectations already face a high hurdle for 2024,” he said.

The 15 biggest S&P 500 companies are up 41%, while the median company is up only 3%, Doll said.

Crossmark remains concerned about corporations’ ability to meet “outsized” 2024 earnings growth expectations in the next 12 months, the CIO wrote, noting estimates call for 12% growth in the S&P 500. August was the first month since March 2022 that the three-month average of S&P upward earnings estimate revisions as a percentage of total revisions exceeded 50%, he noted.

“Although global corporate earnings continue to grind higher, equity markets remain hostage to the whims of the bond market, resulting in a choppy stop-start backdrop,” Doll wrote.