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At this time every year, Robert Doll, president and chief investment officer at Merrill Lynch Investment Managers, gazes into his crystal ball and tells investors what the future is likely to hold. For 2005, the forecast isn't particularly inspiring.

In fact, Doll is calling for economic growth to slow, earnings to miss expectations, interest rates and commodity prices to rise, and equity returns to be barely positive.

"We think it will be a 'muddling through' sort of year," he said Tuesday morning at a press conference in lower Manhattan.

"With earnings slowing this year, so will returns -- not to mention the fact that the fourth-quarter rally may have borrowed from the returns for 2005," he said, further noting valuations are relatively high, with the

S&P 500

trading at 20 times earnings in 2004 compared to its historical average of 16.

In his annual investment outlook, Doll said real gross domestic product growth in the U.S. should slow to less than 3.5%, as consumer spending softens and capital spending takes a hit from high energy costs, rising interest rates and lower productivity.

Doll thinks consumer spending will rise between 2.7% and 3% this year from a 3.7% pace in 2004, citing an end to fiscal and monetary stimulus. He expects business spending to climb 5% to 8% vs. more than 10% last year.

The global economy is also projected to slow down, with Europe lagging and China continuing to lead the pack, and GDP growth is expected to be around 7%.

Doll believes that inflation will continue to creep up in 2005, thanks to a weaker dollar, high oil prices and rising labor costs. As a result, he said, the

Federal Reserve

will "show no sign of slowing its campaign of measured one-quarter-point rate hikes." The funds rate should end the year at 3.5% from 2.25% currently and the 10-year note will likely end the year at 5%, he said.

In 2004, Doll accurately predicted that U.S. growth would hit 4% for the first time in five years and that the Fed would double the fed funds rate. But like most analysts, he incorrectly forecast that the 10-year note would climb above 5%.

With so many forces working against the economy in 2005, Doll said corporate profit growth will probably slow to between 5% and 8%, down from the 19% growth seen over the past two years. That, in turn, forms his view about the stock market's potential struggles this year.

In the third year after a bear market has ended, Doll said stocks have historically returned 2.9%. Still, he does expect stocks to outperform both bonds and cash this year and noted that many companies could raise their dividends, buy back stock and increase their merger-and-acquisition activity, given the strength of corporate balance sheets.

Doll also noted that the average stock will probably underperform its index for the first time since 1999, as large-cap and high-quality issues outperform small, low-quality names. It's worth noting that Doll made the same prediction at the start of 2004 and small-cap issues thrived.

As for yawning trade and budget deficits, Doll expects them to improve in 2005 for the first time in 10 years, as the dollar declines and tax receipts go up.

Finally, Doll forecasts that commodity prices will perform well again this year, with oil prices averaging more than $40 a barrel, due to continued geopolitical risks and a lack of spare capacity from the Organization of Petroleum Exporting Countries.

Given all these prognostications, Doll recommends that equity investors seek out high-quality, predictable, dividend-paying stocks this year and suggests an overweight position in international names. He also advocates a position in bonds with shorter durations and said exposure to commodities through hedge funds or private-equity funds is advisable.

Over the next decade, Doll said he expects stocks to grow 8% per year while bonds should gain 5% and cash should return 2%.