Investment Insights: The U.S. engine may be heating up

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Crowded beach in Atlantic City.The second quarter U.S. GDP report was released amid another week of company earnings data. Overall, the Global Investment Management team would score both of the accounts with a passing grade.

The growth print came in at 2.6%, which was quite a bit better than the 1.2% growth seen in the first quarter. Although the data showed a nice pickup and nodded to the resilience of the U.S. expansion, which is now going on eight years, the figure did still miss the consensus estimate of 2.7%. Consumer spending, the largest component of U.S. GDP, carried much of the weight during the period increasing at a 2.9% annualized rate after a paltry 1.9% gain in the first quarter. According to Bloomberg, not only did consumers spend at an increased rate, businesses also increased investment in equipment, which rose the most in two years at 8.2%.

It is nice to see domestic businesses finally putting some dollars to work after finicky increases in investment during the recovery. Many companies have been more apt to spend their capital in financial markets, employing stock buybacks, increasing dividends, or finding merger opportunities as a way to increase their value. That time may be coming to an end. Early signs embedded in the most recent GDP report, like the increase in capital expenditures, and rising interest rates may bode well for organic growth as companies will need to focus more on long-term development. The question becomes, do these business see continued optimism in the U.S. economy or is this the capital spend of last resort?

We think that it’s a little of both. The U.S. stock market, as evidenced by the S&P 500 or the Dow Jones, is near all-time highs after tremendous earnings reports over the last few quarters. As of this morning, Bloomberg’s earnings aggregation shows 350 companies of the S&P 500 have reported and posted an average 5.7% sales growth and 10.5% earnings growth. The energy sector has chalked up a whopping 173% increase in earnings since last quarter, but still ended up missing earnings estimates by over 3%; the sector has shrunk from around 10% of the S&P 500 Index to 6% due to the decline in prices, but seems to be recovering.

The U.S. recovery doesn’t seem to be showing any signs of stopping either. The ISM Manufacturing PMI, which gauges the growth and health of U.S. manufacturing, recorded a 56.3 for July, which shows robust expansion. Consumer spending momentum is picking up steam and potential fiscal stimulus is still on the horizon. So when these multinational and domestic companies forecast out, they are continuing to see the U.S. as a bright spot for additional revenues.

The Global Investment Management team continues to believe the financial markets are in a mild sweet spot over the near term. Earnings data has been booming for the first half and economic data seems to be improving for 2017; however, we are still concerned about a slowdown in profits going into 2018 and the possibility of a 2019 recession. Cracks in third quarter consumer spending, via deterioration in some data such as the recent slide in auto sales, would be detrimental to growth. For now, we remain cautiously optimistic and look to markets abroad as the global recovery picks up pace, particularly in Europe.

Chart showing various market returns as of 8/1/17

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