As much as our outlook for the economy is positive, it seems unlikely to us that earnings will rise as dramatically in the next five years as they have in the past. Corporate profitability rates are already at peak levels, largely the result of cost cutting, productivity enhancements and mergers and acquisitions that companies have effected over the past decade. Future growth in profits will have to come more from increasing sales than cutting costs, and in a slow growth global economy, this won't happen at a double-digit rate. Our outlook calls for moderate growth in economic output and inflation. The most recent consumer debt and default statistics indicate to us that the consumer is overextended and is likely to retrench.
Industrial companies are, in general, experiencing better successes.
Although the bond market appears to reflect the expectation that the Federal Reserve will raise interest rates by 25 basis points in July, we believe that slowing consumer spending will cause the Fed to do nothing. By and large, inflation remains in check. Our clients stock portfolios are now positioned with slightly higher cash levels, the result of selling off or reducing a number of existing holdings, particularly in the technology area, to lock in gains. Current market valuation levels make it more difficult to find new companies in which to invest at attractive levels. Although we are concerned about the market, we are comfortable with the valuation levels and growth potential of the individual companies in the portfolios.