The world will go on after this crisis fades and investors may be missing some important developments. A story that is not being told is that of the positive corporate picture that developed during earnings reporting season. Nearly 75% of S&P 500 companies beat estimates, which is well above the historical average. Some of that has to be taken with a grain of salt as companies guided estimates down going into earnings season, but companies continue to tightly control costs and we have heard many companies comment on the solid demand picture they are seeing.
Additionally, companies are heading into the latter half of the year with solid balance sheets. Debt levels are reasonable, cash levels are high, and interest rates remain low. This should enable companies whose confidence could grow following the end of the debt debate to increase their investment in capital and labor. This more micro story has been slow to be recognized by investors as it has largely been overshadowed by more macro issues.
Economy still sluggish, but improving
After a summer slump that we believe was largely caused by temporary factors, including the Japanese disaster and a dip in confidence due in large part to events unfolding in Washington, we are starting to see some nascent signs of a stabilizing economy, which we believe will improve through the balance of the year. This acceleration would likely help to further boost consumer and corporate confidence, which we believe continues to be the key to ramping up growth. As confidence grows, spending decisions get made at both the business and personal levels, which helps faith in the recovery to solidify, which leads to more investment and spending, and so on—improving the velocity of money that needs to increase to really kick the economic expansion into higher gear. However, there is a growing risk to our view as policy mistakes in Washington could hinder confidence for some time to come, potentially holding economic growth below potential.
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