By Joy Wiltermuth

Inflation is a problem beyond the recent spike in oil prices, says Crossmark CEO Doll

Federal Reserve Chair Kevin Warsh speaks at a press conference in Washington on June 17.

The "high-risk" bull market in stocks needs Federal Reserve Chair Kevin Warsh on its side, according to Bob Doll, CEO at Crossmark Global Investments.

"This inflation problem is much more entrenched than the Fed is willing to acknowledge," Doll told MarketWatch - noting that while inflation isn't in runaway mode above 6%, 7% or even 8%, it has been running above the Fed's 2% annual target throughout the current decade.

"It's pretty clear that inflation is not only [about] oil," he said. Oil prices (CL00) recently plunged to about $70 a barrel on hopes for an end to the Iran war, while inflation climbed above 4% in May.

The "bull-market part" means investors need to be invested in the stock market, Doll said. Yet for the run to continue, earnings need to exceed expectations, "which they've done," he noted. "And the Fed needs to be on our side," or at worst "neutral," he added.

Doll's view is that earnings probably will remain good, even if they may not exceed expectations, while the Fed is probably done lowering rates for now - and instead might need to hike them. "When you have these kinds of valuation levels, things need to go pretty perfectly," he said.

John Butters, senior earnings analyst at FactSet, said in a Friday client note that industry analysts were expecting the S&P 500 index SPX to increase 21.2% over the next year, to 8,918.27.

Butters also pegged the S&P 500's earnings growth rate at 23.1% for the second quarter, with the forward 12-month price-to-earnings ratio at 20.1, or above the five-year historical average of 19.9. Fed rate cuts in 2024 and 2025 helped create more room for the bull market to run.

Warsh on Wednesday declined to say if a Fed interest-rate hike was on the table for July, during a discussion with other central bankers in Sintra, Portugal.

Instead, he reiterated that he prefers to have a "good family fight" internally among Fed members on rates, while reiterating his commitment to getting inflation back down to a 2% annual rate.

Stocks were mixed on Monday, with the S&P 500 up about 0.1% near 7,505, while the Dow Jones Industrial Average DJIA was 0.3% higher and the Nasdaq Composite Index COMP was down 0.3%, according to FactSet.

A blistering rally in tech stocks helped the S&P 500 and Nasdaq cement roughly 15% and 21% second-quarter gains, their best quarters since 2020, according to Dow Jones Market Data.

Of note, the 2-year Treasury yield BX:TMUBMUSD02Y turned lower to about 4.15% after Warsh spoke on Wednesday, a sign that expectations for rate hikes have started to ease. Short-term Treasurys are particularly sensitive to rate-hike expectations.

What helped yields retreat on Wednesday was Warsh's mention of falling inflation expectations in the wake of his first press briefing at the helm of the central bank in June.

"He is firmly against forward guidance," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. "But markets are clinging to every crumb Warsh is giving them in the several weeks after the FOMC meeting."

While the odds still favor Fed rate hikes for 2026, they've come off peak levels recently, Goldberg said, adding that Warsh's mention of fading inflation expectations was notable.

TD's view is that the Fed will keep rates on hold through 2027, or "for the foreseeable future - unless something materially changes."

-Joy Wiltermuth

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