Markets, GDP and Corporate Earnings on May 1, 2018

Rick Welch |

This report is written as an executive summary of how we have interpreted recent market, GDP and corporate earnings data.  If you have any questions, please do not hesitate to contact Rick Welch at (215) 603 2976 or

Markets – April was a challenging month for investors as equity markets remained volatile and bond prices fell.   Equity markets remained on edge as investors largely ignored a strong earnings season and instead focused on new inflation worries, a more aggressive Fed, trade tensions and a slumping technology sector. In April, domestic and international equities all moved slightly higher as we saw gains in US Large Caps (S&P 500 was +0.27% and DJIA was +0.24%), US Small Caps (Russell 2000 was +0.94%) and International (ACWX was +0.56%). Volatility (as measured by VIX) finished April at 15.93 (with a high mark of 25.72 on April 2nd), below the long run average of 20. The Barclays US Aggregate Bond Index fell 1.16% as the yield on the benchmark 10-year US Treasury bond jumped from 2.74% to 2.94% during the month, reaching a five-year high of 3.04% on April 25th. We view the 10-year yield crossing 3% as mostly symbolic for now – when ^TNX crosses 4% (forecasts are mid to late 2019) it could have an increased impact on stock price movement as investors reallocate from stocks to bonds to take advantage of the increased yield offered by fixed income assets. For 2018, we see the following year-to-date performance data: DJIA (-2.24%), S&P 500 (-0.95%), Russell 2000 (+0.46%), International (+0.04%) and Barclays US Aggregate Bond Index (-3.04%).

GDP - The Advance Estimate of Q1 GDP growth released by the Bureau of Economic Analysis ( showed that the US economy grew at an annual rate of 2.3% in the first quarter of 2018, above consensus forecasts of 2.0%. This result, in the typically sluggish first quarter, compares favorably to Q1 2017 (1.2%) and Q1 2016 (0.6%). Most forecasts predict an acceleration in growth in Q2 as the effects of the Tax Cuts and Jobs Act become more pronounced. During the quarter, increases were seen in personal consumption expenditures (PCE), nonresidential fixed investment, exports, private inventory investment, federal government spending and state and local government spending.  Good consumer spending and business investment suggest that economic growth will continue as we move further into 2018. Inventory investment contributed 0.43% to GDP after subtracting 0.53% in Q4. Consumer spending, which accounts for almost 70% of US economic activity, rose just 1.1% during the quarter, the slowest rate since Q2 of 2013, as consumers spent less on vehicles, clothing and dining out. Real disposable income increased 3.4% in Q1, compared with 2.6% in Q4. The personal saving rate, which is personal saving as a percentage of disposable income, was 3.1% in Q1 compared to 2.6% in Q4.

Earnings - The Q1 earnings season is well underway with over 55% of the companies in the S&P 500 having reported their quarterly earnings.  Thus far, the results are better than expected with 79% reporting (EPS) above estimates and 74% reporting sales above estimates. EPS and sales growth are both above their 5-year running averages.  Blended earnings growth for Q1 is an impressive 23.2% today (with all sectors reporting growth for the quarter), higher than the estimated Q1 earnings growth rate of 17.1% at the start of earnings season. On a sector basis, thus far, we see strong earnings growth in Energy (+89.1%), Materials (+41.4%), Technology (+31.8%), Financials (+26.5%) and Industrials (+23.5%).  The Real Estate sector is reporting the lowest year-over-year earnings growth rate of +6.9%. From a valuation perspective, the forward 12-month P/E ratio is now 16.3 (down from 18.4 on February 1st), which is above both the 5-year and 10-year averages.