The raging bull market of the last 12 months will continue throughout 2010 but at a slower, steadier pace, giving investors reason to draw back slightly on risk, according to BlackRock’s Bob Doll, the vice chairman and global chief investment officer of fundamental equities and Curtis Arledge, managing director and co-head of U.S. fixed income portfolio management group, in their forecast for the first quarter.

As the bull market shifts from an economy driven by the return of liquidity and improving price-to-equity ratios, it will trade double-digit returns for less robust ones. That said, improved earnings and reasonable valuations should lead the recovery this year, as investors will continue to reallocate cash into the markets.

Doll predicted that U.S. corporate earnings growth—fueled by productivity gains, expanding markets in the developing world, low inflation and a declining dollar—should jump about 20% this year, leading stock prices, as represented on the Standard and Poor’s 500, to rally another 12% from the beginning of the year.

While risky assets will likely continue to outperform safe ones, Doll and Arledge are emphasizing quality due to the much more muted pace of the recovery that is expected going forward. This means overweighting companies with clean balance sheets and plenty of cash at hand such as healthcare, technology and telecommunications. Financials, of course, are out.

Tech companies cater to the now more cautious investor, affirmed Morningstar ETF Analyst John Gabriel, as companies like Google, Microsoft and Apple have some of the cleanest balance sheets in corporate America. In a rush toward quality, Doll and Arledge  are overweighting large cap stocks and growth styles.

Attractive returns are still in store for the fixed-income market this year, though low-quality bonds’ exceptional performance in 2009 makes them more fairly valued today. Long-term Treasury yields are also more fairly priced today than they have been in years.

John Eckel, president of Pinnacle Investment Management, insists U.S. Treasuries are creating the next big bubble, as he expects to see interest rate rise in the short- and long-term over the next year. “U.S. Treasuries are overvalued and they’ll decline going forward due to concerns over inflation that will mean returns on these Treasuries will be low, if not negative.” Municipal bonds will stay in high demand throughout the year, Doll and Arledge affirm, with income rates likely to soon increase.

Emerging markets will be a bright spot in 2010, though the days of high double-digit returns in these markets we enjoyed last year may be long gone. Doll and Arledge are focusing on countries that are exhibiting strong financial controls. That may leave China’s easy-money rise into the No. 2 spot in the world’s economic standing out of the equation, though.

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