Bob Doll, chief equity strategist at BlackRock, says stocks are being pulled in two directions and are likely to keep to a narrow trading range until economic data improves.
"For the past several months, stocks have been caught between the crosswinds of a range of positive and negative forces," he says.
Equities have a number of things pushing them higher: corporate profits are strong, merger and acquisition activity is picking up, there is some nascent capital expenditure, and improvement in corporate debt issuance, he says.
The Federal Reserve has said it will remain accommodative. US data may have been weak, but eurozone and Asian data has surprised markets with its strength, he adds.
Pulling stocks in the opposite direction is a lack of corporate and consumer confidence, driven by weakness in the job market. Doll believes this remains the biggest single threat to the economic recovery.
In the US, the housing market continues to disappoint and deleveraging poses a threat across the board.
That said, Doll thinks a double dip remains unlikely. Although recovery will be slow, there has already been substantial progress and he is particularly encouraged by the resilience of the corporate sector.
"There are a number of downside risks and the economy remains fragile....but we maintain our view that the US economy is unlikely to experience a double-dip recession and the global economy will not slide back into recession," he says.
The strength of corporate profits would usually signal a significant increase in spending, but corporates have been reluctant to reduce their cash levels, partly in response to uncertainty over legislative changes from the Obama administration.
However, Doll believes companies will shortly have to resign themselves to lower growth or put their excess capital to work, and there are signs that capital expenditure is increasing, he says.
"The growth in corporate profits and the ongoing decline in corporate credit spreads are forecasting economic strength. In fact, corporate profit margins as a percentage of GDP are near 40-year highs," he adds.
The strategist expects the S&P to trade in a narrow range between 1,020 and 1,120 until the economic outlook improves.
"We do not expect to see a dramatic breakout of this range at the current time, but do believe that as economic conditions slowly improve, the positive forces should win out."
