Now that Britain's vote to leave the EU is history, the fate of the stock market hinges on a single variable: corporate earnings.
"If earnings do not improve, we can't see how equity prices will be able to advance," said Bob Doll, chief equity strategist at Nuveen. "If earnings do improve, it should pave the way for better market performance."
Doll oversees the Nuveen Large Cap Core Fund (NLCDX - Get Report) , Nuveen Core Dividend Fund (NCCDX) and the Nuveen Equity Market Neutral Fund (NMECX - Get Report) . The three funds recognized their three year anniversaries in June and each received a four star rating from Morningstar.
Earnings were down 5% in the first quarter, but the level of earnings beats over Wall Street analyst estimates thus far in second quarter earnings season has been impressive, according to Doll. If the economy grows slowly and oil prices remain stable, Doll believes earnings will grow somewhere in the low single digits in the third quarter and in the mid-single digits in the fourth.
"The average beat this quarter is almost five percentage points. The historic average is about three so we are doing better than usual," said Doll. "Oil is no longer down and the dollar is no longer up. They were the big headwinds for the last four or five quarters."
Equities are no longer as cheap as they once were, but Doll sees valuations as reasonable, especially compared to bonds and cash. Within the equity market, Doll is most bullish on mid-cycle cyclicals, companies that can generate positive free cash flow and those with higher levels of domestic earnings.
"I don't think the market can have much upside if it's still the old leadership of utilities, materials and staples," said Doll. "We need the cheaper industrial, consumer discretionary and selected technology names to do somewhat better. And they will if earnings are better. And then that group that led the first half of the year will fade."
Finally, following the Brexit vote, the next big macro issue appears to be uncertainty over the U.S. elections. According to Doll, Donald Trump's most clearly articulated views indicate the possibility of triggering trade wars, which would likely be negatives for the U.S. and global economies. From those perspectives, the equity markets would currently favor a Clinton victory in his view.