Global Economic Overview, May 2012

Originally Published on May 11, 2012 (May 2012 Dividend Gems)

As we enter a new cycle of global macroeconomic risk, the U.S. stock market continues to resist being pulled into the euro zone vortex.

Despite having recently declined to a low of 12,689, the Dow Jones Industrial Average has since rallied past 13,350, only to face another retracement. It is now poised to experience a more sizable retracement. While the S&P 500 has faced a similar series of volatile movements, it maintains a technically weaker outlook in coming days/weeks.

All things considered, thus far the U.S. market has remained fairly bullish due to continued earnings strength. However, earnings momentum is fading. During the early part of earnings season about 80% of companies beat consensus estimates. As of May 10, that figure is down to 66.16% with 458 of 500 of the firms in the S&P 500 having reported.

Despite the relatively strong performance seen in Consumer Staples in recent months, Procter & Gamble missed earnings by a large margin. Meanwhile, AT&T, Coca-Cola, Kimberly-Clark and Kraft continue to shine. At the other end of the spectrum, oil-related securities continue to show considerable weakness. Notably, Chevron has thus far held up considering the retracement in crude pricing.   

Although Cisco beat consensus earnings estimates, shares plunged after managed lowered full-year 2012 earnings. Many analysts are now beginning to question whether the Information Technology sector will maintain its outstanding earnings growth through 2012.

Corporate profit margins for firms in the S&P 500 continue to remain high. Combined with record-low interest rates, the U.S. stock market remains positioned for continued upside, albeit after the current risk cycle has passed.

Another concern related to future earnings (and thus market valuation) is the issue of corporate profit margins. Despite concerns of an approaching contraction in profit margins, we do not believe this is likely for another two years or more due to a variety of reasons.