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05/2011: In the equity markets, it's earnings, earnings, earnings!

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Published on May 5, 2011

While real estate may be all about location, location, location, in the equity markets, it's earnings, earnings, earnings. This has been abundantly clear in recent weeks, as the stock market has continued to climb a wall of worry. Despite oil over $110/barrel, a sinking dollar and ballooning national debt levels, a spectacular start to earnings season — particularly in the technology sector — has given the market the boost it needed to sustain its upward path.

Basically, first quarter 2011 earnings season thus far has been an absolute blowout. Even our optimistic forecast for earnings per share growth of 15% is being left in the dust — growth is currently tracking at over 21%. Strong earnings are being reported across the board, with the energy, technology, industrial and materials sectors leading the charge.

Technology is truly knocking the cover off the ball, with EPS growth of 30%, as the late-90s style tech boom continues. Manufacturing's big comeback was highlighted by the sector's strongest quarterly growth since 1997. Consumer spending is at all-time highs, to the benefit of consumer discretionary sector earnings. In summary, this is what a bull market feels like.

In another sign of the times, mergers and acquisitions are setting a blistering pace. As usual, mid- and small-cap companies are benefitting from these deals. These indexes have surged, with the Russell 2000 closing out April at an all-time high.

The good news is not limited to the U.S. Signs of a synchronized global economic expansion are evident in the performance of emerging markets like South Korea, which just reported stellar first quarter growth numbers driven by its economic mainstay — manufactured goods. In the euro zone, manufacturing numbers continue to defy gravity. With France and Germany setting the pace, there is hope that the export-based recovery will take root across the currency bloc despite the many economic headwinds facing the region. This does not mean that risk has taken a holiday. Standard & Poor's in mid-April announced that it had downgraded its outlook on U.S. debt to "negative" from "stable" while affirming its AAA rating. Our view has been that the market ultimately will force its own discipline and the necessary fiscal austerity despite political gamesmanship. The S&P pronouncement is evidence that the market is in control.

We know that April showers bring May flowers. From a global perspective, most stock markets are being showered with positive corporate earnings, robust M&A activity and a veritable manufacturing boom. Given these conditions, investors too fearful to venture out into the rain are the ones likely to end up all wet

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