GDP and corporate earnings exceed expectations


Wall Street’s nerves were high at the start of last week, as interest rates jumped with the yield on 10-year government bond hitting 3%. Fortunately, strong earnings from companies like Facebook and Amazon helped ease those nerves and lift markets.

We are a little more than halfway through corporate earnings season, and so far the results are very good. About 82% of large companies have reported better-than-expected earnings, and the earnings growth rate for the first three months of the year is 25% when compared to the first quarter of 2017.

Last week also gave us our first look at the report card for the U.S. economy for the beginning of 2018 – Gross Domestic Product (GDP). Economists were expecting growth of 2.0%, but the economy actually grew 2.3%.

This was despite lackluster spending by you, the consumer, which increased just 1.1% and was the slowest consumer spending growth rate since the second quarter of 2013. About half the 2.3% total growth came from business spending (e.g. spending on equipment and inventories).

Some economists are worried that if interest rates keep rising, as they did last week, the economy could slow. This may be true to a degree, but growth is still expected to be healthy at around 3% for all of 2018.

Additionally, “core PCE,” the Federal Reserve’s (Fed) preferred inflation measure, was released Monday morning, and it showed a year-over-year increase of 1.9%.

While this is just shy of the Fed’s 2% target, the committee is not expected to raise short-term interest rates from current levels when it meets Wednesday, May 2nd.

Simply Money Advisors expects the Fed to raise short-term interest rates two more times in 2018, but the chances for three more hikes this year are rising because of increasing inflation expectations.

The Simply Money Point

While market turbulence is expected due in part to higher interest rates, some of the major fears are beginning to subside. For example, North Korea and South Korea agreed to sign a treaty, ending the Korean War that began in 1950.

Also, earnings from tech companies have been much better than expected. While there are still some trade tensions with China, the rhetoric has improved for now. At Simply Money Advisors, we will continue to watch the May 22nd deadline for the U.S. to list the goods that tariffs (taxes) will be applied, as that could reignite Wall Street’s fears of a trade war.

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