By: Dividend Sensei
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Weekly Economic Data Review
A busy week in both economic news and earnings releases that resulted in a flat week for the S&P 500 but that’s not bad considering the index is up 10.6% year-to-date and after a solid 10% return in 2016.
New home sales and consumer confidence were stronger than expected, but of course what really mattered was the strong 2.6% GDP growth in Q2. That was slightly above the projections of both the New York and Atlanta Fed, though weaker than analysts were expecting.
Still it’s a solid number and combined with excellent earnings (200 companies reported last week) points to the bull market continuing.
Specifically, as of Friday, July 28th, 57% of companies in the S&P 500 have reported, and 73% of them have beaten on both the top and bottom lines.
Overall the blended average Sales and EPS growth rate is 5.2%, and 9.1% YoY, with 10/12 sectors reporting growth.
Better yet? only 26 companies have issued negative guidance for the year, 52% of those who are updating guidance, much lower than the usual 75%.
The tech sector especially is bullish with positive guidance updates/negative updates running at about 2:1.
Looking forward here’s how analysts see the rest of the year playing out:
- Q3: sales and earnings growth of 4.8% and 6.1%, respectively
- Q4: sales and earnings growth of 5.2% and 11.7%, respectively
- Full Year 2017 sales and earnings growth of 5.5% and 9.5%, respectively
Given the slow rate of economic growth, wage growth, overall weakness in consumer spending, and no tax reform, this is a very promising outlook. Of course it also means there’s more downside potential if the next two earnings seasons disappoint.
Meanwhile here is how the Atlanta and New York Fed’s real time GDP growth models look now:
New York Fed GDP NowCast: 1.9% for Q3 (down 0.1% from last week)
Atlanta Fed GDPNow: 2.8% for Q2
Of course while the Atlanta Fed model was pretty much spot on last quarter (2.5% projection vs 2.6% actual) we need to keep in mind that the Atlanta Fed’s model is notorious for reducing expecations as the quarter progresses.
The good news is that the risk of a recession in the next three to four months remains very low (2.49%) and the longer-term (9 month) risk of a recession is also insignifigant.
Meanwhile bond markets are pricing in long-term inflation right around the Fed’s 2% goal, meaning that there is almost no risk of the Fed having to do emergency (faster than expected) rate hikes later that would likely trigger a recession.