Last year was a banner year for stocks -- the kind for record books. But will 2010 prove to be just as good? According to Bob Doll, vice chairman and global CIO of Equities at BlackRock (NYSE:BLK), 2010 will indeed be a good year for the U.S. market, with equities outperforming cash and Treasuries, not to mention most developed markets.

"There will be very few places where you can do better than in equities," Doll said although he doesn't expect equities to ascend at the torrid pace we saw in 2009.

But why should you care what he says? Here's why: He's the CIO of the world's largest asset-management firm, which had $3.2 trillion in assets under management as of Sept. 30. What's more, every year, Doll makes a list of predictions. Last year, he made 12 predictions and 11-1/2 were correct. So what's he predicting for 2010?

He is predicting the following:

  • Economic growth is above trend but below the pace of normal recovery (5+%) that typically follows a severe recession such as this last one .
  • Equities outperform as earnings improve and P/Es begin to contract.
  • The U.S. outperforms the rest of the developed world.

An in-depth look: First the economy
Doll forecasts that the economy will grow above 3% in 2010, as structural headwinds weigh on recovery. Those headwinds include continued high unemployment, deleveraging on the part of the consumer, leveraging up by the public sector, a closed securitization market, and state government problems.

One major propellant for the economy, in Doll's view, is that business inventories, which were at depression levels, will be rebuilt. Federal stimulus (the majority of which is expected to hit this year), low interest rates, and a continued weaker dollar (which helps spur exports) will also serve as boosts for economic growth this year.

Though some experts -- such as Bob Pozen, who visited Fool HQ this fall -- are wary of the economy's ability to stand on its own two feet once federal stimulus wears off, Doll says the forces of the economy are bigger and that inventory rebuilding will far exceed the stimulus. "Growth could come down when the stimulus wears off, but it doesn't go negative," he said.

The market
Despite tempered economic growth, Doll says he expects a significant rise in earnings this year. He is predicting a U-shaped economic recovery, but a V-shaped profit recovery on account of last year's aggressive cost-cutting, inventory restocking, modest revenue increases, weaker dollar, and earnings. Some 40% of S&P 500 profits now come from outside the U.S., and Doll estimates that 60% to 70% of incremental profits come from outside the U.S. "So the real driver for the stock market's earnings is not the U.S.; it's outside the U.S.," he said.

He expects earnings for the S&P 500 to grow 20-plus% in 2010. Doll says he believes we're now at a stage where earnings will increase faster than the stock market. He has a target of 1,250 for the S&P 500, which equates to earnings of $75-$80 at 16-17 times earnings.

Aside from earnings, a core driver for stocks, Doll says liquidity caused by the stimulus, as well as an uptick in M&A, will keep the rally going this year. He also says he expects that the retail investor will finally come back this year after having taken money out of equities all last year. Although "the pace of advance will not be anything like the past nine months, it will still be a profitable place to be," he said.

Favorite sectors and companies
Doll says he thinks health care, technology, and telecom will outperform financials, utilities, and materials. His thesis for investing in health care is built on the premise of clarity on health-care reform, as well as demographic trends and an improving standard of living. What's more, he says the sector is inordinately cheap, trading at a 20%-25% discount to market. His favorite companies in the sector are Amgen (NASDAQ:AMGN) and UnitedHealth Group (NYSE:UNH).

In technology, Doll says the U.S. is a leader and continues to gain market share all over the world. "We're entering a period in the U.S. where we're starting to have some new products, some replacement product cycles, that have gotten long in the tooth, and all of that along with strong balance sheets and free cash flow should enable them to outperform," he said. Doll favors Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM) in the sector.

In telecom, Doll favors AT&T (NYSE:T) and Verizon (NYSE:VZ), which have nearly 6% yields and good free cash flow. He says he thinks dividends for both companies are likely to be higher now than they are today.

In short, Doll thinks the market is going higher this year, in an environment where high-quality stocks outperform, big outperforms small, and growth outperforms value. He also says emerging markets will outperform as their economies grow significantly faster than developed ones.

Doll participated in our expert summit this past fall. Share your thoughts on his observations by sounding off in the comments section below.

Fool contributor Jennifer Schonberger owns shares of Microsoft but of no other companies mentioned in this article. Microsoft and UnitedHealth Group are Inside Value picks. Unitedhealth is also a Stock Advisor Recommendation. Motley Fool Options has recommended a diagonal call on Microsoft. The Motley Fool owns shares of UnitedHealth Group and has a disclosure policy.