It is too early to dismiss the continued growth in the equity markets, according to Bill O’Neill, chief investment officer at Merrill Lynch.

This week we have seen the large core eurozone economies’ first quarter GDP results outperform Merrill’s predictions, as did US retail sales, following a stable employment report from the week before. Nonetheless, China’s poor production performance of late has caused Wall Street to decline further for the second week in a row, and O’Neill believes investors have been left uncertain on their strategies as the growth outlook is uninspiring but risk levels are not urgently threatening.

“The potential for a further stock market rally now appears to be connected to the path of US Treasuries and the US dollar,” says O’Neil.

The crashing oil prices may have indicated to bond holders that a rate hike by the Fed will be delayed until next year, and as business spending increases US unemployment should decrease, he predicts. In addition, fears over a potential crash of the Chinese economy will be allayed as its inflation is brought under control going into the summer, allowing credit to become more available, says O’Neill, going on to add that clients will be able to take advantage of this temporary strength in sovereign bonds to offload their exposure to the market.

With regards to the low-valued dollar, the CIO said: “The fact that the front-end of the US yield curve remains so flat (i.e. interest rate hikes are expected to be small in the next two years) gives little basis for a US dollar rebound over the medium term; yet the greenback is cheap still and the adjustment to European Central Bank rate hikes is discounted in the market. Therefore, the euro could edge slightly lower against the US dollar, especially given the persistent euro sovereign peripheral risk”.

In addition to these observations, O’Neill says the trend in lower implied and observed volatility we have seen of late will continue and will coincide with his predicted shift in market drivers to further strengthen the equity markets.

In his investment notes, O’Neill has said for some weeks that lower commodity prices will benefit consumers worldwide; this in tandem with the easing of pressure on central banks to raise interest rates will encourage equity market growth. He adds the only real threat to aggressive investors in the near future is the potential sharp rebound of the US dollar.