Prospects for real economic recovery have built up for months. But Christian Hviid, chief market strategist at Genworth Financial Asset Management, remains cautious.

"What worries me is this complacency that's kicked in once again in the broader markets," said Hviid, who helps set investment policy for some $7 billion in assets, in an interview. "If we can paint the picture that things might start slowing down again in the second half, with more headline risk and the jobless recovery we've seen so far, I think people will start looking at risk more carefully."

We already know about underlying headwinds such as unemployment, which is expected to remain high for a long time. There are continuing problems in housing, with the lingering possibility of a second wave of resets in the second half of this year and potentially lasting through 2012. And then there's the transfer of systemic debt from the private sector to the public sector. Once the government stimulus plays out, economic growth could begin to slide downward.

According to Hviid, the first quarter of 2010, which saw a tepid 3.2% increase in growth -- slower than the customary 7% he would expect to see following such a severe recession -- could very well end up being the strongest quarter of 2010, if inventory rebuilding and government stimulus end up driving the bulk of the GDP. Both are short-term growth drivers.

"We cannot underestimate the impact that government stimulus has had when $1 out of $5 in income is basically government-transferred, in the form of either unemployment insurance or other types of givebacks," he said. "It's something that at least until now has sustained consumer spending to a certain degree, but it's not something that we can hang our hats on, since at some point the government is going to have to start addressing its own fiscal budget deficit situation."

Earnings could contract
The other fly in the ointment for markets is the possibility of a decline in company earnings. With heightened expectations now baked into the market, Hviid says he doesn't think analysts are focused at the aggregate level on issues that might hit companies, such as moderating growth, higher taxes, or inflation.

We could also see greater pressure on profit margins because of higher commodity prices. Hviid saw non-core inflation, which includes the impact of food and energy prices, accelerate during February and March. That's creeping into producers' cost structures, which could put downward pressure on earnings later this year. Specifically, producers are paying more than they're able to pass onto consumers, which could translate into a profit-margin squeeze.

"To the extent that a lot of what has been driving the market as of late has been cost cutting," he said, "I think most of that cost cutting window is over, because companies are operating fairly lean and mean and have gotten rid of a lot of the fat from an operating cost standpoint. So we might be making a case for a hard environment to beat earnings. Top-line growth really needs to drive things."

We've indeed seen some revenue growth during the first-quarter earnings season, which has also helped bolster the bottom line. But Hviid doubts the sustainability of top-line growth. The companies with the most optimistic outlooks have heavy foreign exposure -- mainly multinationals.

"With higher taxes down the road, the potential profit margin squeeze as a result of the inflation story, the question is from a P/E standpoint where do we go from here?" he said. "If rates start rising -- which ultimately they will -- the prospects for P/Es is that we actually see P/E multiples contract."

As a result, Hviid says investors should be careful in what industries and sectors they consider. "There will be winners and losers," he said. "At the end of the day I think it calls for an active approach to the market environment we foresee going forward."

Follow a total return strategy
Given the uncertainties at play, Hviid says solely relying on capital appreciation most likely won't work for the rest of 2010. As such, he maintains investors should follow a total return strategy, which involves focusing on dividend stocks and interest payments from bonds in combination with purchasing options. The good news is that after a record number of dividend cuts in 2009, we're seeing dividends snap back. According to Standard & Poor's, 284 dividends were raised during the first quarter.

"It's not about chasing returns," said Hviid. "It's about trying to make money and keeping it."

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Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. You can follow her on Twitter. The Motley Fool has a disclosure policy.