Corporate earnings reporting season is underway for companies listed on the S&P500 and thus far, results have been much stronger than anticipated. These numbers are closely watched as they give an indication of the health of the economy. Not at all surprising, US financials and consumer discretionary companies reported the most declines in year over year earnings per share. These results mean that either there will be a longer than expected wait for corporate America to feel the negative impact of the housing slump and related mortgage debacle, or more likely, that management has collectively done a good job of “managing expectations” for profit growth, in effect under-promising and out-delivering! We maintain our position that analyst consensus estimates are too optimistic for 2008 and 2009 and are therefore subject to downward revisions.
As positive as we are in the longer-term outlook that sees a recovery from the current brief economic downturn, we still advocate holding 10% – 15% cash positions in equity portfolios to protect against the risk of another market correction and we favor invest-ment in the defensive sectors of the market such as consumer staples.
The fact remains that growth in North America is slowing, the U.S. Housing Market is in bad shape and is expected to decline further, the U.S. consumer is spending less, and jobs are disappearing in the U.S. Add to that higher food and gas prices and you don’t get a pretty picture for the North American economy.
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