Retail sales continue to generally come in ahead of our expectations

We continue to see signs that the U.S. economy is on the mend, but visibility beyond the summer months appears severely constrained.

Consumer cyclical firms are still planning for top-line gains but are bracing for margin pressure, particularly in the second half of the year.

Most luxury goods stocks are still expensive, even after the recent pullback, but some warrant a closer look.

We continue to see signs that the U.S. economy is slowly improving, and while our expectation for a modest recovery among consumer cyclical firms in 2011 remains intact, the group is by no means out of the woods.

On the positive side, retail sales continue to generally come in ahead of our expectations, and traffic growth has been impressive. Costs have remained in check, driving record corporate profits in some cases. The unemployment picture has also cleared up a bit, and many expect job prospects to become more favorable in the coming year.

However, we remain balanced in our view and note that the impact of holiday shifts, year-ago government stimulus, and mounting input cost pressures could lead to a couple of choppy quarters and, ultimately, margin compression as the year unfolds. As such, we still project mid-single-digit top-line growth for much of the sector, but we see early signs of incremental slowing in the second half of the year.