Specific Market Reviews – United States
- Q1 GDP undershot expectations with growth moderating to an annualised 2.3%, well down on the 3% growth rate of the previous 6 months despite an ever tightening labour market with an unemployment rate of 3.8%, the lowest since 1969. As usual, a weaker Q1 is always dismissed as a temporary blip and with the tax cuts kicking in the economy is expected to pick up steam again with no sign of a recession on any forecaster’s horizon. Higher energy costs will be a headwind but expectations for Q2 GDP growth are now running at a whopping 4%.
The economic upswing that began in 2009 is now the second longest on record but has been very lacklustre in comparison to the ‘boom and bust’ cycles we had got used to since 1945. Average real GDP growth was nearly 5% in the 1960s compared to not much more than 2% this cycle, employment growth has been far less rapid and, crucially, income growth has barely budged.
Corporate earnings rose a blistering 24% in Q1 led by Energy, Materials, Financials and IT with revenues also up a stonking 8%. Whilst a portion of the earnings uplift can be attributed to the Trump tax cuts, US companies are also benefitting from strong domestic and global growth and, for the multinationals, the tailwind of a weak dollar in 2017. Earnings growth for 2018 as a whole is forecast to be in the region of 20%. Despite the strong earnings season, share price reaction has been muted with concerns that Q1 will prove to be the peak earnings quarter of the cycle and as good as it gets. However, whilst last years ‘positive surprise’ nirvana may be over, the strong earnings growth should provide a healthy support for stock prices for the remainder of the year.
The Fed continues with its steadily tightening monetary policy with two 25bps rate rises already this year (making seven in total since 2015) and another two most likely, taking the Fed Funds rate to 2.5% by year end with maybe another three next year to a terminal rate of 3.25%.
Healthy global growth, high stock prices and cheap borrowing continue to fuel corporate confidence with an M&A boom in the States. The AT&T/Time Warner merger, T-Mobile’s bid for Sprint, and the Comcast/Fox/Disney ménage being three examples.
The strong earnings growth has taken some of the heat out of valuation concerns and the S&P500 P/E has actually fallen as earnings expectations are outstripping share price growth. The market is trading at 16x forward earnings, not cheap but not excessively expensive either.
Summary: The economy remains in good shape and corporate earnings growth is forecast to be around 20% this year which mitigates some of the valuation concerns. There are though some headwinds; Trump, trade tensions, rising Bond yields and the pace of Federal Reserve Bank interest rate rises.