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Tap The Brakes On Optimism

Earnings and earnings expectation have driven and always will drive stock prices.

First-quarter earnings are now being released. This is a crucial period because companies often give earnings guidance for the full year.

Surprisingly, with about a quarter of the Standard & Poor’s 500 companies reporting, earnings are tracking 6 percent higher than the consensus estimates.

This is impressive, but a deeper look reveals that the majority of the earnings growth comes from one sector – financials. The remaining sectors have accounted for less than 40 percent of the upside.

Although earnings forecasts are ticking higher, investors should be cautious. Analysts are typically too optimistic this time of year in full-year estimates.

There are potential headwinds coming from around the world, such as the European debt crisis, tensions in the Middle East and an economic slowdown in China. Investors should consider a gradual reduction in their stock holdings.

Although the major stock indexes have risen, much of this gain is driving by only a handful of stocks, such as IBM Corp, Google Inc. and Apple Inc. Be cautious right now. The risk-return ratio isn’t favorable.

Ed Butowsky is the managing partner of Chapwood Investment Management and is an internationally recognized expert in the investment wealth management industry for over 25 years. Check out Ed’s discussion topics for a quick tip or two for your own financial well-being in his Media Center or follow Ed Butowsky on Facebook.

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