"10 Predictions" for 2007: BlackRock's Bob Doll Sees Another Good Year for Equities, with Expanding Valuations Fueling the Next Phase of the Bull Market.

Market Volatility Will Make Security Selection Critical in '07; Large Cap, High Quality Should Outperform Small Cap, Low Quality

U.S. Economy Will Slow to a "Soft Landing," While Non-U.S. Growth Continues to be Stronger; Attractive Prospects for Japanese, Latin American Equities

Fed Likely to Lower Interest Rates by Mid-Year, Reacting to Housing-Led Slowdown and Easing of Inflation

NEW YORK -- With the U.S. economy on track for a "soft landing" and inflation remaining under control, expanding equity valuations will fuel the next phase of the bull market in 2007, leading to another good year for equities, according to Robert C. Doll, Vice Chairman and Chief Investment Officer of Global Equities at BlackRock, Inc. (NYSE: BLK), the leading global investment manager.

But Doll believes 2007 will also likely be marked by increased market volatility that generates "stronger divergences" in performance between the best- and worst-performing areas of the market -- making effective security selection all-important.

"The new year begins with the world awash in liquidity, global economic growth still strong despite the U.S. slowdown, record high corporate profitability, low inflation and interest rates, and relatively strong investor confidence levels," said Doll. "Despite the fact that several risks remain, we believe that, given this backdrop, 2007 should be another strong year for the equity markets, although not one without some potential bumps along the way."

Current Valuation Levels Strengthen Appeal of Equities

Doll, who has been publishing his annual "Ten Predictions" for the year ahead in the financial markets and the economy since 2001, notes that equities now represent an especially good value, particularly because valuation levels have been significantly compressed by exceptionally strong corporate earnings in recent years coupled with good, but not spectacular, equity returns.

"Price-to-earnings ratios for the S&P 500[R] Index are now at their lowest levels in 12 years," he said. "In our opinion, the second half of the bull market will most likely be fueled by expanding valuations, with price/earnings ratios expanding for the first time in six years."

Also, high liquidity levels and cash-heavy corporate balance sheets should provide for another year of market-friendly dividend increases, stock buy-backs, and M&A activity.

"The keys for this outlook to hold would be the soft landing scenario to play out as we expect it to, and for inflation to remain well behaved," he said. "Should the economy slow more than we expect, or should inflation fears re-emerge, we would anticipate weaker market performance."

As Market Volatility Increases, Security Selection Will Be Critical; Domestic Equities Could Close Gap with International Stocks

Over the past few years, Doll noted, differences in returns between whole sectors and among the best- and worst-performing individual stocks were small. Doll, however, believes this trend should end in 2007, as market volatility creates wider divergences in performance -- and makes effective security selection an even more critical element of the investment process.

"The slowing global economy, increasing global interest rates and the potential for unforeseen geopolitical events should all contribute to increased volatility in the markets," he said. "In our opinion, the companies that are best positioned to take advantage of the prevailing environment are those that have exposure to foreign sales, have the ability to increase dividends, and are generally larger and of higher quality."

At the same time, although continued strong performance among international equities should continue, it is possible that their multi-year outperformance of domestic equities may be nearing an end.

"U.S. markets have consistently lagged international markets over the past several years, and as a result, U.S. stock valuations are looking increasingly attractive," he said. "For a similar reason, we are quite positive on Japanese equities. We also favor Latin American markets, which we believe can benefit from a favorable combination of declining inflation rates, reasonably strong earnings growth, and decent valuations."

Global Economy Leads the Way; Lower U.S. Interest Rates Likely

According to Doll, in 2007, the global economy should continue to follow many of the trends that marked 2006. "Chiefly, we believe economic leadership will continue to move from U.S. growth in general, and the U.S. consumer in particular, toward business investment, exports and other sources of non-U.S. growth," he said. "Corporate profits should remain positive, thanks to solid corporate fundamentals and balance sheet strength as well as to non-U.S. economic strength, but the rate of gain will likely slow noticeably as record-high profit margins will be difficult to sustain."

Some additional positive momentum for equities should come, Doll believes, by likely moves by the Fed to begin lowering interest rates sometime around mid-2007, given the current housing-led slowdown in the U.S. economy and an expected, continued easing of inflation pressure.

"We recognize, however, that should inflation surprise on the upside, or should economic growth be stronger than we expect, the Fed would be reluctant to cut rates, and it is still possible that the Fed's next move could be to tighten yet again," he said.

Ten Predictions for 2007

Here are Doll's "Ten Predictions for 2007" with his commentary on the key trends.

1. The U.S. economy slows to between 2% and 2.5% growth as non-U.S. growth remains relatively robust.

We expect the weaker housing market to deduct about 100 basis points from U.S. gross domestic product (GDP) in 2007. This is a significant effect, to be sure, but not one that, in our opinion, will trigger a recession. Outside the U.S., we expect economic growth to continue to be reasonably strong, with global GDP expanding at a rate of around 4% to 4.5%.

2. Earnings growth in the United States is below trend for the first time since 2001.

Historically, the average rate of earnings growth is around 7%, and we expect 2007 earnings to be slightly below that. Importantly, we are not forecasting a reduction in earnings or a profits recession, but rather merely a slower level of growth.

3. The U.S. yield curve turns modestly positive as short rates fall and long rates rise.

Should the soft economic landing occur and inflation remain relatively tame, we expect that the Fed will begin easing rates in mid-2007. Regarding longer-term yields, we think it would be difficult for yields to move much lower and expect them to drift higher over the course of the year. As a result, we expect a somewhat mediocre year for fixed income assets.

4. Equities experience another good year as price/earnings (P/E) ratios expand for the first time in six years.

In our opinion, the second half of the bull market will most likely be fueled by expanding valuations. In addition, still decent (albeit slower) economic and earnings growth, low inflation, strong cash flow, abundant liquidity, and the possibility of interest rate cuts all provide a strong backdrop for stocks in 2007.

5. The average stock underperforms the broad market averages as large-cap and high-quality stocks outperform small-cap and low-quality stocks.

Large cap stocks are attractively valued when compared to small caps, and over the past few months, have started to exhibit stronger levels of earnings growth. To us, this suggests that large cap stocks are poised to outperform. Similarly, higher quality stocks are relatively undervalued and may be positioned for better performance. In these sorts of environments, growth stocks also tend to outperform value, so from a style perspective, we favor growth.

6. The energy, healthcare and information technology sectors outperform the utilities, telecommunications and consumer staples sectors.

The technology and healthcare sectors both have attractive valuation levels and companies within these sectors tend to have high levels of cash on their balance sheets. Additionally, tech companies tend to have a great deal of exposure to fast-growing non U.S. markets, and with healthcare costs rising and with healthcare expenses growing as a percentage of GDP, the healthcare sector seems well positioned for the future. Continued strong demand for oil and other energy sources, capacity and production limitations and the potential for unpredictable price spikes in energy-related commodities all suggest that energy companies may be headed for another good year.

7. The U.S. trade-weighted dollar moves to its lowest level in a decade.

Slower absolute and relative U.S. economic growth, the likelihood of the Fed cutting interest rates while foreign central banks continue to tighten, and unfavorable trade and financial balances all suggest to us that the value of the dollar may continue to fall.

8. Japan is the only major country to experience increased nominal growth, leading to equity market outperformance.

High levels of liquidity, strong employment growth, increases in productivity, high levels of exports to booming Asian markets and reasonable valuation levels should provide a solid backdrop for Japanese equities in 2007.

9. Volatility and return spreads increase from historically low levels.

Although stock markets experienced a significant correction before recovering strongly in 2006, over the past few years, technical measures of volatility and return spreads have been quite low, meaning that the differences in returns between whole sectors and among the best- and worst-performing individual stocks were small. We expect that trend to end in 2007, as the slowing global economy, increasing global interest rates and the potential for unforeseen geopolitical events all contribute to increased volatility in the markets.

10. Populist politics experiences a renaissance in the United States.

We expect issues such as increasing the minimum wage, eliminating the favorable tax treatment of dividends and capital gains, and calls for more protectionist-oriented trade policies to come to the forefront in 2007. Although it seems likely that a minimum wage increase could be enacted, we believe that most of these other initiatives would have a difficult time making their way into actual law. In any case, however, these sorts of issues carry with them the possibility of "headline risk" as investors gauge the potential impact of these policies on financial markets.

The Scorecard for 2006

Doll also provided a recap of his "10 Predictions" for 2006, along with a "score" for each prediction and an assessment of the actual outcomes. "If there is an overall theme to our 2006 results, it is that we were mostly correct in our predictions about the direction of the economy and capital markets, perhaps too early in forecasting slower earnings growth and outperformance by large-cap stocks, and just plain wrong in believing that the Republicans would win the mid-term elections," he said.

1. The overall U.S. economy slows to 3% growth as the front end (the consumer) weakens while the back end (capital spending) is relatively strong.

Score: Correct

Clearly, the weakening housing market has slowed overall economic growth in the U.S., but several areas of strength remain, and we are not among those who are forecasting a recession. While the final numbers will not be available for some time, 2006 GDP growth looks like it will come in right around the 3% level.

2. Earnings fail to meet the consensus expectation of double-digit percentage gains.

Score: Incorrect

First-, second- and third-quarter earnings were all comfortably in the double digits, and, at present, it appears that fourth-quarter earnings growth will be right around the 10% level. Forward guidance, however, suggests that corporate earnings growth in 2007 will slow.

3. The U.S. yield curve inverts for the first time since 2000, while the 10-year Treasury bond trades with a "four-handle" yield all year.

Score: Half-correct

The yield curve did invert early in the year and remained inverted for much of 2006 as the Fed increased the target short-term interest rate four times and long-term yields remained more-or-less steady. While the 10-year Treasury yield spent most of the year in the 4.5% to 5.0% range, it did cross the 5% mark for a couple of months in the spring.

4. The U.S. equity market experiences its first 10% correction since 2002, preparing the way for the second half of the bull market.

Score: Correct

Stocks corrected significantly in late spring and early summer, with the average U.S. stock falling by around 12% and stocks outside the U.S. being hit even harder. Stocks have since experienced a noticeable recovery, and in our opinion, we are currently witnessing the start of the second half of a longer-term bull market.

5. Growth outperforms value and large cap outperforms small cap for the first time since 1999.

Score: Incorrect

For the year as a whole, the difference in performance between small caps and large caps was not too significant. But value stocks clearly outperformed their growth counterparts in 2006, with the Russell 1000 Value Index posting a 12-month return of 22.25%, and the Russell 1000 Growth Index advancing 9.07%. These numbers, however, hide the fact that the mid-year market correction sparked a change in leadership from small cap, lower quality, more cyclical stocks to larger cap, higher quality, more predicable securities. In our opinion, those trends are likely to continue into 2007.

6. The U.S. dollar resumes its downtrend.

Score: Correct

For most of 2006, the U.S. dollar experienced a gradual weakening, but that trend accelerated sharply in the last couple months of the year. The main driver of the decline in the dollar has been higher economic growth rates outside the U.S. (most notably in Europe) and diverging interest rate trends. Looking ahead, we recognize that the fundamental factors pushing the dollar lower could continue, but we do not believe that the dollar's value will decline to the point that it would cause a severe economic disruption.

7. Led by Asia, non-U.S. equity markets outperform U.S. equities for the fifth consecutive year.

Score: Correct

Once again, non-U.S. markets outperformed their U.S. counterparts. European markets were definitely an area of strength, with both developed and emerging markets posting solid returns, but leadership also came from many Asian markets (with the obvious exception of Japan).

8. Strong cash flow leads to another year of high dividend increases, share buybacks and M&A activity.

Score: Correct

High levels of dividends, share buybacks and, most significantly, M&A activity all helped to push stock markets higher in 2006. In fact, 2006 was a record year for M&A activity, with a total of $3.79 trillion in deals announced around the world, according to Thomson Financial.

9. Commodity prices will be higher in 2006 than they were in 2005.

Score: Correct

Commodity price volatility increased in 2006 -- with a strong run in the first part of the year followed by a sharp correction over the summer and then a subsequent recovery -- but overall, most commodity prices moved higher for the year.

10. Republicans retain control of Congress, but relinquish some of their advantage in the 2006 election.

Score = Incorrect

The exact opposite happened during the mid-term elections with the Democrats winning thin margins of victory in both houses of Congress. The prevailing political environment looks to be a tricky one, with an uncertain legislative agenda, increased partisan rancor and the beginning stages of the 2008 election already beginning to heat up.

What's An Investor to Do?

In addition to his oft-repeated advice to investors to continue working closely with their financial professional to ensure that their investment portfolios are designed to best meet their long-term goals, Doll offered the following general investment guidelines for 2007:

* Overweight equities: We believe equities are attractively valued when compared to other asset classes (particularly bonds) and that investors should consider overweighting stocks in their portfolios, where appropriate.

* Think about U.S. equity styles and sectors: In an environment of slowing economic growth, we recommend a focus on mutual funds or other investment vehicles that focus on large-cap and/or higher-quality stocks. Additionally, we believe investments focusing on the energy, healthcare and/or technology sectors may represent attractive opportunities in 2007.

* Stay global: In addition to the diversification benefits offered by international investing, we believe the fundamental case for non-U.S. stocks remains quite sound, particularly if the U.S. dollar continues to weaken. Specifically, we have a particularly favorable view toward Japanese and Latin American equities.

* Don't ignore commodities and other non-correlated investments: As 2006 has shown, commodities can be quite volatile, but we believe the fundamentals of commodities investments remain sound. Commodities and alternative investments also tend to offer returns that are not correlated with stocks and bonds, which can make them a valuable diversification tool. Remember, however, that these investments also entail special risks and are not for everyone.

* Stick with the basics: In an environment that could likely be characterized by renewed volatility, it can be difficult to determine an investment strategy and stick with it. As always, we encourage you to work closely with your financial professional and to rely on the basic investment strategies of staying fully invested and focusing on diversification.

About BlackRock

BlackRock is one of the world's largest publicly traded investment management firms with USD 1.075 trillion in assets under management. The firm manages assets on behalf of institutions and individuals worldwide through a variety of equity, fixed income, cash management and alternative investment products. In addition, a growing number of institutional investors use BlackRock Solutions([R]) investment system, risk management and financial advisory services. Headquartered in New York City, the firm has over 4,700 employees in 18 countries and a major presence in key global markets, including the U.S., Europe, Asia, Australia and the Middle East. For additional information, please visit the company's website at www.blackrock.com.

The opinions expressed are those of Bob Doll as of January 9, 2007, and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. Investment involves risk. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Information and opinions are derived from proprietary and non-proprietary sources. Index performance is hypothetical and is shown for illustrative purposes only. You cannot invest directly in an index.

S&P 500 is a registered trademark of The McGraw-Hill Companies, Inc.

[c]2007 BlackRock, Inc. All Rights Reserved.