Fin - Breakout - US

More U.S. Downgrades to Come, but Stocks to Stay Strong

Jeff Macke
Breakout

Phil Dow, director of equity strategy for RBC Wealth Management, says Standard & Poor's move to downgrade its outlook on U.S. debt is the first in a series of these actions that probably will come.

"These ratings agencies seldom act in isolation," says Dow, suggesting that Moody's and Fitch Ratings, the other big debt-raters, likely will join with their own negative outlooks in the weeks to come.

Dow thinks the downgrades are off the mark in this case, arguing that U.S. economic growth is now self-sustaining. Accordingly, he says that the end of QE2 this summer will be the last of the quantitative easing for the near term -- presumably obviating the need to downgrade the U.S. further. Pressure on the greenback has been a constant of late, as evidenced by the BRICS nations efforts to create a new global currency to allow the rest of the world to move away from the U.S. dollar.

With its downgrade of the U.S. to negative from stable, S&P said there's about a 33% chance it will downgrade the country's AAA rating sometime during the next two years.

Just what gives Dow hope for the future? The drumbeat of strong earnings from U.S. corporations, for one. Earnings growth has been revised higher since the beginning of the year, he notes. The strategist also sees revenue starting to climb, which diminishes the bearish concern that earnings can't continue to outpace revenue growth forever, as has been the case during the last two years.

Dow sees the S&P 500 approaching 1,380 by year-end, and he suggests there's a chance he may be low with that target. With markets continuing their recent slump, he's stepping out on an increasingly thinner limb.

So is he right, or is he whistling past the graveyard? Watch the clip and decide for yourself.

Once you do, be sure to share your comments, either below this post or by sending an email to breakoutcrew@yahoo.com.

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