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Investing Specialists

Corporations Bring Home the Bacon

The underlying strength in corporate earnings and consumer spending is just too hard to deny, says Morningstar's Bob Johnson.

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As I suspected, the positive earnings news out of individual companies dwarfed the mostly positive macroeconomic data released this week. The outstanding news from individual companies was very broad-based, ranging from consumer goods leader  Apple (AAPL) to luxury goods retailer  Coach (COH) to manufacturing giant  Illinois Tool Works (ITW). Many corporations produced the trifecta of improved sales, stunning margins, and higher forecasts for the year ahead.

The macroeconomic data for the week wasn't so bad, either. Both new and existing home sales showed gains from month to month and exceeded expectations as well. Initial unemployment claims were finally down again after a couple of weeks of moving the wrong way. Excluding aircraft, durable goods orders were also surprisingly good. I love to see strength in durable goods orders, because today's orders are tomorrow's production and shipment numbers. Strong orders, increasing production, and slim inventories all bode well for higher employment during the coming months. Higher employment will mean even more dollars in consumer pockets. Let the virtuous cycle continue.

I continue to believe that the economic momentum will be hard to stop. Fears that modestly higher interest rates or an expiring housing credit are going to derail this recovery are misplaced. Just as occurred with the expiration of the cash for clunkers program, there could be a couple of soft months after the home buyers' credit expires or rates rise. Ultimately sales should stabilize at levels higher than before. The underlying strength in corporate earnings and consumer spending is just too difficult to deny.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.