Despite anticipating quarterly earnings growth to drop and weakness in the major indices, Merrill Lynch Investment Managers President and Chief Investment Officer Bob Doll said he expects an equity markets rally in the second half of the year.

Doll admitted the stock market appears trapped because a stronger economy will likely lead to an increase in interest rates, which could "have a compressing affect on" P/E ratios. Further, he added, soft economic data causes fear about corporate profits’ strength.

Last week the Dow dropped below the 10,000 mark again, the first time in two months, while the Nasdaq hit a new low for the year, and the S&P 500 nearly hit its bottom mark for 2004. The mid-week rally last week due to Microsoft’s dividend announcement couldn’t last, and Doll said investors are spooked by inflation, interest rates and questions about the strength of economic growth.

Doll expects earnings growth to drop to the mid-teens during the third and fourth quarters from the more than 20% it has experienced in the second quarter. However, he does expect a rally in equities in the second half, with equities finishing first among the major asset classes for the year, with cash coming in second and bonds in the third slot.

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