- While we do not see a U.S. recession on the horizon, recent economic data have been lackluster.
- Expectations for first quarter earnings remain low, but are mostly “baked into” share prices. We’re forecasting only 1 to 2 percent earnings growth for remainder of the year.
- Dollar strength is yesterday’s market story. Year-over-year profit comparisons get easier beginning in the second quarter. Organic sales growth remains anemic, however.
- Given our current estimate of 2006 as fair value for the S&P 500, and our tepid outlook for corporate earnings, we think the current market rally will not be sustained.
Here are some potential “wild cards” for the second half of the year:
A much weaker US dollar: This would be a major surprise, but the U.S. Federal Reserve may refrain from further interest rate increases. This would make the dollar less attractive relative to the Euro and the Yen, and boost corporate earnings here in the U.S.
Europe & China: Weak capital levels in Europe’s banking system and bad debts in China continue to cause concern. In Europe, the can is being kicked down the road, so to speak, and no permanent solutions have been found. China is at least addressing their overcapacity problems, and if this continues it could be a major market positive longer term.
The U.S. Presidential election: The Obama administration has been particularly aggressive when it comes to financial, medical, environmental and labor regulation. As his term comes to a close, the markets may look favorably on the prospect of a somewhat lighter regulatory hand.
Bottom line: We aren’t expecting a breakout year in the markets, but we don’t see a recession either. Expect more of what we’ve seen for the last 15 months or so, with tepid growth and increased volatility as the Fed recognizes the limits of monetary tinkering.