Forget Europe: Signs of a Slowdown in the U.S.

lightning storm
lightning storm

Financial markets around the world are fixated on Europe as it grapples with its debt woes. Though probably overdone, investor paranoia is understandable. The fallout for the global economy would be massive if things spiraled out of control, unlikely as that may seem for the moment.

While potentially catastrophic developments overseas may be captivating, investors would do well to stay focused on more subtle developments in the U.S. Much of Wall Street remains bullish on the prospects of an economic recovery, but some signs suggest that a slowdown may be materializing nonetheless.

Watch Corporate Guidance and Economic Indicators

Hosted software provider (CRM) is the latest company to report strong results for the first quarter but provide a forecast that couldn't live up to Wall Street's expectations. On Thursday, the company said it expected earnings per share of between $1.13 and $1.15 for the full year. That was well below the $1.28 analysts had forecast, and shares tumbled in trading after hours.

The results from mirror those of networking giant Cisco (CSCO) last week. While Cisco delivered a strong first quarter, shares were initially hammered based on a lackluster outlook for the rest of the year. Hardware giant Dell (DELL) also came under fire as concerns about its ability to maintain profits grew despite solid results for the first quarter.

A slew of retailers including Lowe's (LOW), Home Depot (HD) and Wal-Mart (WMT) have also provided skimpy guidance for the rest of the year. And while companies may well be trying to game Wall Street by setting the bar low only to dazzle later, recent economic data suggests that the economy could also be slowing after a sharp rebound in demand from depressed lows.

A set of closely watched indicators released Thursday by the Conference Board showed that the economy may be cooling as it heads into the second half of the year. Those findings echo leading indicators monitored by the Economic Cycle Research Institute, which noted that "the pace of improvement in the overall economy is set to slacken in the months ahead" as measures fell to a 40-week low.

Soft retail sales and a sudden rise in jobless claims have contributed to the darkening picture.

Bulls Remain Unbowed

Some high-profile investors have recently taken to calling for a much sharper economic recovery. Billionaire hedge fund manager John Paulson, who made a fortune shorting the housing market before its bust, has been telling investors in his fund that he now sees a sharp "V"-shaped economic recovery ahead.

And consensus earnings forecasts for the year -- at nearly record levels -- mirror these lofty expectations. (Of course, stocks would still be reasonably priced if earnings were to take a modest hit. Roaring share price gains, though, would be far less likely.)

For bulls, the picture in Europe isn't so dire either, once you look closely. Despite constant comparisons to the Lehman Brothers implosion in 2008, the markets may in fact be better prepared for the European debt crisis. Even if troubled European countries like Spain, Portugal and Greece all defaulted and bondholders lost a third of their money, losses would total a manageable $550 billion, analysts at Credit Suisse wrote in a research note on Friday. That compares to the roughly $1.8 trillion in write-offs that financial institutions have taken since the start of the credit crisis.

So the more worrisome trend may be a slow atrophy of the profit picture, which could eventually prove to be a bigger drag on the market than the sovereign debt explosion many investors have been bracing for.