The S&P 500 broke to a new high this past week but stocks have been caught in a fairly narrow range, as markets look to each economic report for its potential influence on Fed policy.
Stocks have defied expectations of a selloff in May, and the S&P 500 is in line for a more than 2 percent gain. While some strategists look for a correction this summer, others say the market could continue to drift higher.
Bob Doll, chief equity strategist and senior portfolio manager at Nuveen Asset Management, said he doesn't expect stocks to really break out until earnings improve.
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"I think for a sustainable breakout to the upside, we're going to need better visibility for the second half. I think if we have a shot at that, it comes from the consumer. The biggest head scratcher is that jobs have improved, initial claims are getting better. We're starting to see some compensation increase, and we've got this dividend from energy prices falling. That should be a recipe for the consumer spending a bunch more money but instead the savings are going up," he said, noting investors may need more time.
"Until we get that visibility, I think we're going to fool around with maybe an upward bias," he said. "Every time, you're starting to feel better, something comes along and you go down 50 points. A big surprise would be if we break up or break down, but I think we fool around in the same range, or go modestly higher."
Some strategists, expecting a selloff, say it's the potential for Fed rate hikes that could make stocks nervous. The Treasury market is also nudging rates higher, and that could be problematic for stocks if the move is too swift.
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"If the Fed does go 25 or 50 basis points, what's going to change for the equity market? History shows, leading up to the first rate hike, stocks do well, and in the first 12 months after the first rate hike, they do OK. We've had a wonderful bull market because earnings and P/Es have gone up. My guess is P/Es aren't going up so the pace of gains is going to slow," he said.
But Doll does expect the S&P 500 to reach 2,200 by year end. His preferred sectors are tech and health care, and he does not like energy or materials.
He said the current market scenario, where stocks barely move but drift higher, will not excite Wall Street. "In the scenario I described, both the bulls and bears are frustrated," Doll said.
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