BlackRock's Bob Doll Sees ''Reasonably Constructive'' 2nd Half for Equities, Expects Stocks to End '07 at ''Higher Than Present Levels''

Though the U.S. economy will grow at a below-trend pace in 2007— and the equity markets will remain volatile— stock prices should still end the year higher than they are today, according to Robert C. Doll, Vice Chairman and Global Chief Investment Officer of Equities at BlackRock, Inc. (NYSE: BLK), a leading global investment manager with more than USD 1.1 trillion under management worldwide (as of March 31, 2007). “We are maintaining a reasonably constructive outlook for the equity markets for 2007— with ‘constructive’ signaling an up year, but ‘reasonably’ suggesting performance will not be as good as last year, and with more angst and volatility along the way,” Doll said in his annual mid-year update and outlook for the economy and financial markets.

“The underlying message to investors is to be realistic. Recognize that we’re in a lower return/higher volatility environment, where the tailwinds of the bull market are not as strong as before,” he said. “It’s an environment where skillful security selection will remain paramount.”

According to Doll, second-quarter U.S. GDP growth is expected to come in above the 3 percent mark, which would erase some of the weakness from the first quarter. “For the second half of the year, we expect GDP growth to be somewhere in the 2 to 2.5 percent range, figures that remain below the long-term trend, but that are still strong enough to keep earnings advancing,” he said.

Short-term concerns for the markets include higher bond yields as well as the possibility of a near-term equity market correction precipitated by technical factors. “In recent years, periods of economic weakness have tended to trigger falling bond yields, which in turn helped to provide a relief valve for stocks,” he said. “That clearly is not happening now.

“Nevertheless, our long-term view for stocks remains positive. Valuation levels are still attractive and the fundamental economic and corporate earnings backdrop, although weaker than last year, remains solid and conducive to constructive performance for equities. We continue to recommend that investors maintain overweight positions in equities and to avoid overreacting to potential short-term setbacks. This strategy has worked well in recent years and it should continue to do so.”

The Fed: Timing Is Everything

Ongoing speculation about the Federal Reserve’s next interest rate move continues to lend uncertainty to views of the market’s prospects. Doll, who has been publishing his annual “10 Predictions” for the year ahead in the financial markets and the economy since 2001, notes that climbing long-term bond yields, along with ongoing concerns about inflation, have resulted in a consensus view that there is now close to a zero percent chance that the Fed will lower interest rates this year.

Doll anticipates that U.S. inflation will remain low, but periodic worries about inflation will surface due to strong world growth, the commodity boom and a weaker dollar.

“For our part, while we continue to believe that the Fed’s next move will be to lower interest rates, it does appear less and less likely that that move will come anytime soon,” he said. “We nevertheless are still holding out hope that weaker growth and low inflation may prompt the central bank to act before the year is out.”

Housing Still a Drag on the Economy

The ongoing housing recession is still acting as the primary drag on economic growth, Doll said. “Consumer credit levels have been deteriorating and both commercial and residential delinquency rates have been moving up, which suggests to us that housing market weakness still may have some way to go,” he said.

The meltdown earlier this year in the subprime mortgage market will not trigger a recession or systemic financial shock, he said, but it will lengthen the housing downturn. At the same time, higher long-term interest rates will exacerbate the problems in the housing market.

On the other hand, however, several factors are countering the recessionary impact of the slowing housing market, including continuing employment growth and increases in average hourly earnings, which are bolstering consumer spending levels. “Exports continue to boom, higher growth levels outside the U.S. are providing stimulus and business investment has shown signs of improvement,” he said.

Global GDP Expansion Will Outpace U.S. Growth

The U.S. export surge illustrates that the world has now moved from a period when the U.S. consumer was the main source of demand growth to a more broadly driven global economy.

“Though the U.S. economy will grow at a below-trend pace throughout most of this year, strong growth internationally will provide some offset to weaker demand in the U.S.,” Doll said. Global real economic growth should be in the 4 to 4.5 percent range in 2007, compared with 2 to 2.5 percent in the U.S.

“The trend speaks strongly to the case for global investing. More and more— and particularly in the U.S. — investors need to be diligent about looking beyond their own borders for the market’s most attractive growth opportunities,” he said.

Update on “10 Predictions” for 2007

In his mid-year update and outlook, Doll also revisited his annual “10 Predictions” on the markets and the economy. Here is Doll’s mid-year commentary on his “10 Predictions” that were first made in January.

1. The U.S. economy slows to between 2 percent and 2.5 percent growth as non-U.S. growth remains relatively robust.

First quarter GDP growth was the slowest in almost five years, but consumer spending has remained good and non-U.S. growth has remained robust. Exports continue to be a significant driver for the U.S. economy, now representing about 11.3 percent of the total economy, and they are expected to grow by about 7.7 percent in 2007— adding 87 basis points to overall GDP. Looking ahead, we expect second-quarter growth to come in somewhere above the 3 percent mark, but to remain below-trend for the balance of the year. Outside of the United States, we expect growth levels to remain strong.

2. Earnings growth in the United States is below trend for the first time since 2001.

Earnings growth has still been reasonably strong given the weakness in U.S. economic growth, but appears to be slowing. We expect that as the effects of slower economic growth work their way through the system, earnings growth will weaken. For all of 2007, we expect earnings growth levels in the high single-digits at best, with mid single-digits more likely.

3. The U.S. yield curve turns modestly positive as short rates fall and long rates rise.

So far this year, long-term bond yields have indeed moved up sharply, resulting in a slightly positive yield curve. Prospects for Fed easing in the second half of this year will continue to be shaped by factors including the weak housing market, slowing employment growth and moderate wage increases. Although we still believe the Fed’s next move will be to cut rates, the timing remains uncertain, but could possibly occur before year-end.

4. Equities experience another good year as price/earnings (P/E) ratios expand for the first time in six years.

So far this year, stocks have moved noticeably higher as P/E ratios have increased. While we believe we have probably seen more than 50 percent of the gains we expect in 2007, equities should still end the year higher than where they are today.

5. The average stock underperforms the broad market averages as large-cap and high-quality stocks outperform small-cap and low-quality stocks.

To date, the S&P 500 Index (representing large caps) has slightly outperformed the Russell 2000 Index (representing small caps). Looking ahead, we continue to believe that the prevailing macro environment of slowing economic and earnings growth will favor large-cap, high-quality stocks.

6. The energy, healthcare and information technology sectors outperform the utilities, telecommunications and consumer staples sectors.

The outcome of this prediction appears somewhat muddled at this point, with energy and telecommunications being among the industry leaders. Looking ahead, we continue to favor the energy, health care and information technology sectors.

7. The U.S. trade-weighted dollar moves to its lowest level in a decade.

Despite some recent strength, the U.S. dollar has indeed been weakening against most major currencies so far this year on a trade-weighted basis, particularly against the euro, with the key factors including weaker relative U.S. economic growth and unfavorable interest rate differentials. The dollar’s weakness has enhanced the investment opportunity of non-U.S. markets, U.S. multinationals and products with a high percentage of earnings outside the United States. While further dollar weakness is likely, we do not expect a precipitous decline that will disrupt financial markets.

8. Japan is the only major country to experience increased nominal growth, leading to equity market outperformance.

While the Japanese economy has been growing above trend, it still remains reliant on exports and domestic demand remains somewhat weak.While we are retaining a positive outlook on Japanese equities, we acknowledge that this position has not generated outperformance so far this year.

9. Volatility and return spreads increase from historically low levels.

Volatility has indeed returned to the markets — a trend that we expect will continue throughout the year. Return spreads have widened slightly, but remain fairly tight. Sources of increased volatility included the U.S. cyclical slowdown, rising interest rates, credit-related events and geopolitical disruptions.

10. Populist politics experiences a renaissance in the United States.

Although Washington has been consumed by debate over the war in Iraq and the early stages of the 2008 campaign, there have been some signs of a resurgence of populist politics – for example, the newly mandated increase in the minimum wage and call for protectionist trade policies. The likelihood of “headline risks” will linger throughout 2007 as investors gauge the potential impact of such changes and other manifestations of populist sentiment on the financial markets.

What’s An Investor to Do?

In addition to his oft-repeated advice to investors to continue working closely with their financial professional to ensure that their investment portfolios are designed to best meet their long-term goals, Doll offered the following general investment guidelines for the remainder of 2007:

• Maintain a global perspective: Reflecting the reality of a global investment marketplace, investors should seek out global cyclicals and increase their exposure to non-U.S. earnings — including by investment in U.S. multinationals with significant overseas business.
• Focus on high quality and predictability: In a lower return/higher volatility market, we recommend an emphasis on investment vehicles that focus on large-cap and/or higher-quality stocks.
• Stick with the basics: In an environment that could likely be characterized by renewed volatility, it can be difficult to determine an investment strategy and stick with it. As always, investors should work closely with their financial professionals and rely on the basic investment strategies of staying fully invested and focusing on diversification.

About BlackRock

BlackRock is one of the world’s largest publicly traded investment management firms. As of March 31, 2007, assets under management were USD 1.154 trillion. The firm manages assets on behalf of institutions and individuals worldwide through a variety of equity, fixed income, cash management and alternative investment products. In addition, a growing number of institutional investors use BlackRock Solutions® investment system, risk management and financial advisory services. Headquartered in New York City, the firm has approximately 5,000 employees in 18 countries and a major presence in key global markets, including the United States, Europe, Asia, Australia and the Middle East. For additional information, please visit the company's website at www.blackrock.com.

The opinions expressed are those of Bob Doll as of June 25, 2007, and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. Investment involves risk. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Past performance is no guarantee of future results. Information and opinions are derived from proprietary and nonproprietary sources.

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