There’s a debt crisis brewing not only for European countries, but for America. Profit Confidential editors have been critics of the U.S.’s inability to reign-in government spending. Based on the White House’s own figures, the national debt will reach $20 trillion by the end of this decade—about 140% of our current Gross Domestic Product. If the economy falls back into a recession, government debt could run higher and GDP could fall, making the situation worse. In our studies of history, countries who have incurred considerable debt, countries that have experienced a consistent national debt to GDP multiple of 120% or more have experienced inflation, currency devaluation and eventually higher interest rates. At Profit Confidential, we believe a home-grown debt crisis is brewing for America and we believe other aspects our financial system will suffer because of it.

I think stock market investors need to be extremely cautious going forward this year. There’s been good price momentum so far in 2012, but the economic news is still lackluster. The stock market’s been going up because of the Federal Reserve, decent corporate earnings, and reasonable valuations. This can only take share prices so far; eventually, the economy is going to have to produce some real growth or investor sentiment will quickly turn.

Last year, the stock market started out strong, and then experienced a hefty correction. It recovered, but was not able to break out of its trading range. Eventually, share prices dropped off a cliff, as investor sentiment was shaken by the sovereign debt crisis in Europe. Only now is the stock market barely above where it was last April and I think we’re due for another change in the price action. (See Trading Action Repeating Itself—What the Stock Market’s Setting Itself up for.)

Investor sentiment changed for the better at the beginning of this year as if the stock market was tired of worrying about the eurozone. Trading volume has been mediocre at best and, while the main stock market averages have gone up, the lack of volume is telling. I expect a stock market correction to occur soon. Commodities could be hit as well.

This is why there is absolutely no rush or great call for individual investors to take on new positions in this market. Investor sentiment is still decent, but investment risk in equities continues to be very high and a conservative portfolio stance is warranted. I would be a new buyer of dividend paying stocks in this kind of market environment, but only after a price correction occurs. While valuations are still reasonable on a historical basis, I don’t see how corporate earnings will be able to accelerate when you have slow growth in the U.S. economy and no growth in Europe. Earnings multiples should be lower than usual in the age of austerity.

This year, the stock market has so far displayed good resiliency, as investor sentiment went positive. Even in the face of less than inspiring economic news, share prices ticked higher. I do have the sense that this positive trading action can continue, but not much longer without some much better Main Street data. And I’m not talking about “confidence” data. I mean real economic growth. Investor sentiment has proven to be more fickle than usual over the last 18 months and you need to be prepared for it to change on a dime.

 The stock market has gone up and so have the spot prices of gold, silver and oil. All these important assets have their own reasons for their price moves, but everything is vulnerable to a correction now. Investor sentiment is holding, but it is fragile. The correction could happen next week, next month or in the bottom half of the year. I’m not sounding the alarm; I’m just reading the stock market’s current signals.

If the S&P 500 Index consolidates around the 1,350 level, then I think it’s fair to argue that the stock market is appropriately valued given all the information we have right now. I’m thinking that this will happen as investors digest news about Greece’s sovereign debt crisis and other economic news.

So, if you think the stock market is close to being fairly valued like I do, then the big question is: what does the future hold for your equity investments? From my perspective, the answer is very little, and that’s why dividends are so fundamentally important.

Dividends have been instrumental in providing returns greater than the rate of inflation since the bear market began 11 years ago. Just pull up a long-term chart on any of the major indices and you’ll see the enormous volatility and lack of trend in the stock market. If fact, looking at a chart of the S&P 500 Index, the volatility since the technology bubble burst in 2000 has been gut-wrenching. Perhaps these are ideal conditions for index traders, but for investors, it’s been a nightmare.

Because of this recent history in the stock market and the modest outlook for the future, I’m only really keen on big-cap companies that pay dividends. Owning the right basket of higher dividend paying stocks is the only way I would approach the stock market today. Investment risk is just too high to be betting a good portion of an equity portfolio on high flyers.

The stock market has eaten through a lot of sector trends over the last few years. Alternative energy stocks, specifically solar panel equipment makers, were very hot for a short period of time. Then the sector was decimated. After that, U.S.-listed Chinese stocks were big moneymakers, only to be annihilated as a group due to weak accounting standards. (See What You Can Learn From the Solar Energy Market Meltdown.) Finally, gold stocks were the cat’s meow; they generated solid capital gains on the stock market, but also corrected significantly.

The point of this analysis is that it’s been a very difficult environment for stock market speculators, pretty much for the entire last decade. Instead of trading the stock market for small capital gains, most investors would probably have been better off just investing in Union Pacific Corp. (NYSE/UNP), a boring railroad stock that’s up over fivefold (not including dividends) over the last decade—and it would have been easier to sleep at night with less work.

My stock market outlook reflects the times that we’re in and the difficult trading environment we’ve experienced in recent history. At the end of the day, I’ve learned over the years that investment risk is as equally important as potential return. In a slow growth global economy (Europe’s basically in recession now), I’d choose large-cap, dividend paying stocks for the bulk of an equity portfolio. Corporate dividends are likely to continue being the only way to beat the rate of inflation for several years to come.

Mention the world international markets these days and you will get frightened looks from people, as they immediately think about the European debt crisis. Yes, that is a big concern, but not a long-term viewpoint that profitable blue-chips use when constructing their investment strategy.

 If we look over the next decade, there is a huge amount of potential for corporate earnings to grow from international markets. If we look at two countries with the biggest populations, China and India, you will notice the growth of the middle class, a huge number of potential customers. These are the clients that blue-chips based here in the U.S. are developing their investment strategy for over the next decade.

 I’ve identified three blue-chips that have a solid investment strategy for corporate earnings growth over the long term. The first is The Coca-Cola Company (NYSE/KO). The company just released its investment strategy and management is extremely optimistic. Jacob Robbins, managing director of the global sweeteners unit of the group, said that he expects 800 million new customers over the next decade, with most of that growth coming from the BRIC (Brazil, Russia, India, China) nations.

 Coca-Cola expects to double net revenue, from $100 billion in 2010 to $200 billion in 2020. Current corporate earnings exceeded estimates, coming in at $0.79 per share versus an expected $0.77. For the year, corporate earnings were approximately 10% higher than 2010. For such a big firm, this is a positive sign that its investment strategy is being properly executed and this firm retains its status with the elite of blue-chips.

 Another firm that has shown outstanding corporate earnings from international expansion is YUM! Brands, Inc. (NYSE/YUM). The firm operates “Taco Bell,” “KFC” and “Pizza Hut.” The key for corporate earnings growth for blue-chips like YUM! Brands is an investment strategy to expand outside the U.S.

 YUM! Brands expects to open 1,500 new stores outside the U.S. in 2012. This is following YUM! Brands’ expansion in 2011 when it opened over 1,500 stores internationally. China is a big part of the investment strategy and corporate earnings growth, as last year alone YUM! Brands opened 656 new stores.

 YUM! Brands is the leader in China, compared to McDonald’s Corporation (NYSE/MCD), which is trying to catch up. YUM! Brands noted that same-store sales in China were growing very strong and the firm expects continued strength with new-store openings to drive corporate profits.

 India is also a key driver for blue-chips like YUM! Brands. India is the second country in new-store openings for the firm, with 101 in 2011. This is the investment strategy that will pay off in large corporate profits a decade from now.

 The third firm and one of the oldest blue-chips is McDonald’s Corporation. With a long-held investment strategy that has driven corporate profits for decades, McDonald’s knows how to execute an international strategy. With stores in over 118 countries and growing, the firm has a history of long-term growth. McDonald’s is now expanding fast in China to try and catch up with YUM! Brands. Its goal is to open a store a day for the next three to four years, according to Peter Rodwell, company president for Asia.

 If you want to profit from the growth of countries like China or India, you don’t need to put your money in a small, unknown firm that might have questionable accounting practices and is traded on a foreign stock exchanges when you can invest in U.S. blue-chips with long histories of driving corporate earnings.

Another benchmark stock reported good corporate visibility for 2012 and it’s another small but positive sign of economic recovery, as well as the health of corporate America. United Parcel Service, Inc. (NYSE/UPS) reported 2011 fourth-quarter revenues that grew six percent to $14.2 billion. U.S. revenues grew seven percent to $8.7 billion during the quarter and adjusted earnings grew 21% to $1.28 per diluted share. The company reported that it expects “modest” revenue growth this year, but corporate earnings should improve at a percentage rate in the low double digits. To me, this outlook is impressive.

If the stock market doesn’t appreciate much this year, it will clearly be undervalued considering the similar corporate visibility we’re hearing from most large-cap companies. The stock market is already trading at a valuation that’s well under its mean and corporate earnings are robust considering GDP growth.

I think it’s likely that the S&P 500 Index will finish its head-and-shoulders formation, probably later next year. When there is another recession (some say 2013/2014), then this would be the time to consider investing in the stock market as a whole. As I’ve written previously, I wouldn’t buy the market at this point in time, even though corporate earnings are solid. (See Dividend Paying Stocks for Income and the Real Estate Market for Capital Gains.)

The financial health of corporate America continues to improve, but this doesn’t mean that share prices will appreciate. It’s going to take a lot of positive economic news to make the stock market appreciate in a meaningful way, not just good corporate earnings. As we know, the employment and housing sectors just aren’t strong enough yet for this to be a reality.

So far this year, the stock market hasn’t been trading on corporate earnings, but on hope for the future. This is always tenuous. The hope that investors are speculating on is related not to corporate earnings or the economic outlook, but to progress regarding the debt crisis in Greece. With so many political elections around the world this year, you can bet that policy makers will be doing everything they can to minimize any more shocks or crises. The goal, it would seem, is to leave the fallout for next year.

According to Bloomberg, the U.S. stock market will have experienced its strongest January since 1997. Corporate earnings in my view are definitely strong enough to call the current stock market fairly valued. It certainly isn’t expensive. Commodities, particularly precious metals, are getting stronger now and investor sentiment is good enough for more upside in share prices.

Are we in a sucker’s rally? My best guess is probably yes. Share prices should be higher based on the corporate earnings we’re getting, but there is a real reluctance out there. A lot of investors, both institutional and individual, are positioned very conservatively or sitting on the sidelines. The stock market is poised for more gains this year, but nothing is “real” or sustainable unless U.S. employment and housing prices improve. Corporate earnings will continue to be strong.

The catalyst we need for a sustainable stock market advance isn’t yet present. Economic news still isn’t strong enough to warrant rising share prices. While corporate earnings are mostly solid, expectations for earnings growth over the coming quarters are modest at best. This makes the potential for a bullish stock market highly very low.

As I’ve written previously, I would be happy if the S&P 500 Index would hold around the 1,300 level for now. All of last year’s investment risks remain, but it’s pretty obvious that investors have grown tired of thinking about the eurozone debt crisis. A Greek default is almost assured and, while this will pressure the euro currency, the news is already priced into the stock market.

What are holding the equity market at its current level are decent fourth-quarter earnings and reasonable valuations. This is a difficult market in which to make predictions, but there is a growing probability—in my view—that the stock market will perform similarly to last year. A strong start, followed by consolidation and then correction is likely to reflect the change in earnings expectations this year. The economic news is mostly expected to be what it is now—lackluster. So, with the expectation for modest gross domestic product (GDP) growth, it’s difficult to imagine improving corporate visibility. Industry specific economic news should continue to be varied this year, with some sectors significantly outperforming others. The certainty about interest rates is useful, but it’s also a sign that the Federal Reserve expects the economy to continue to be difficult. There’s no bright light at the end of the tunnel yet; it’s continued mediocrity for next while.

With the expectation of choppy economic news and the likelihood of declining earnings expectations over the coming quarters, individual stock selection is absolutely key in a market without a tailwind. (See Austerity, Inflation, Sovereign Debt & Earnings Growth—An Investor’s Survival Guide.) Price strength in gold, silver and oil is a necessary confirmation if the stock market is going to advance further in a meaningful way. My view is that the stock market will be holding up well if the S&P 500 index can build a base around 1,300. As I said, the economic news isn’t yet strong enough for share prices to make a big advancement. Good corporate earnings were the catalyst for a strong January, but the stock market’s next catalyst is elusive.

Very shortly, the market will be in the “lull” between earnings seasons and this makes share prices that much more vulnerable. With only economic news and geopolitical events to go on, investors will be skittish. Accordingly, the trades in the stock market will be event-driven or corporate-specific only. A general investment strategy in this kind of market isn’t likely to work too well. Outperformance is all about owning the right stories at the right time. Fortunately, the economic news right now isn’t bad enough to cause a major decline in sentiment. If we can hold around the current level, the stock market will be doing well.