U.S. GDP growth rate surges. Did markets care?

On the latest edition of Market Week in Review, Adam Goff, managing director, investment practice, and Consulting Director Sophie Antal Gilbert discussed U.S. gross domestic product growth for the second quarter, a potential softening in trade tensions between the U.S. and the EU, and second-quarter earnings announcements.

Q2 economic growth rate in U.S. not a surprise to markets

The U.S. Commerce Department announced that gross domestic product (GDP) grew at a 4.1% clip during the second quarter of 2018, Goff said. In his view, this is a solid data point that indicates the nation’s economy is growing at a robust pace. “Looking further under the covers, you can see strong consumer demand coming through,” he remarked, “plus, the fact that there was an inventory drawdown of roughly 1% means that there’ll probably be additional growth in the future, as businesses will likely have to ramp up production to meet demand.”

However, Goff noted, the strong showing by the U.S. economy did little to move markets. Why? Investors were by-and-large already expecting the good news, with most economists having already predicted a strong second-quarter GDP growth rate, he said. “In short, much of the positive news was likely already baked into market expectations,” Goff concluded.

Trade deal between U.S. and EU lifts markets

Turning to trade, Goff said that the July 25 agreement between U.S. President Donald Trump and European Commission President Jean-Claude Juncker—which halts plans for additional U.S. tariffs on European goods and calls for talks on currently imposed tariffs—was a positive surprise for markets. “Investor expectations surrounding these talks had been somewhat grim, so news of the deal was something that was genuinely unexpected by many,” he said, noting that markets appeared to breathe a sigh of relief when the news broke.

“A lot of the negative speculation about what could happen in regard to tariffs was focused around European automobile companies—and these businesses saw their stock prices rise almost immediately,” Goff said. In addition, U.S. markets also climbed on the back of the announcement, he said.

Strong results as Q2 earnings season continues

Switching to second-quarter earnings season, Goff said that one of the biggest surprises has been that the focus in markets has actually been on earnings, as opposed to other news. “This is probably due to the fact that, during the week of July 23, we had a relatively benign backdrop of both solid economic numbers and positive news on the tariff front—which allowed the spotlight to shift more to earnings, particularly those of tech firms,” he said.

So, what are the key takeaways at this juncture? Roughly 80% of companies in the S&P 500® Index that have reported outperformed their earnings expectations, Goff said, making second-quarter earnings season a strong one. In addition, the struggles of some tech companies (such as Facebook and Netflix) and the strong performance of others (such as Google and Amazon) underscores the lofty expectations for tech stocks, in his opinion. “For these stocks that are priced for perfection, I believe there’s a very high standard among investors on what’s good enough to really move the price up. Conversely, investors appear to be skittish enough that whenever there’s a genuine disappointment involving a tech company, that company’s stock price tends to drop quite significantly,” he noted.

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