Holy earnings week, Batman!

Not a total disaster

The first read on second quarter GDP came in at 2.1%, down from the 3.1% growth we saw last quarter. Components of GDP growth tell the tale of two cities we’ve been seeing through other economic indicators. Consumers seems fine as their spending jumped to its highest level in 1.5 years, coming in at 4.3% (from 1.1% last quarter) driven by spending on cars and trucks, food and drinks, and clothing (guilty as charged). Businesses, however, were less optimistic with fixed investments falling 0.8%, the steepest decline in 3.5 years. 

Moral of the story: Consumer spending accounts for the majority of GDP growth and it’s still coming in at healthy levels. The slowing business growth seems to be driven partially by uncertainty regarding our global trade relationships, but if this growth doesn’t come back in the near future, it will bleed through into the labor market and then impact the strong consumer that has been keeping this economy afloat. Read: this China trade dispute needs to end ASAP. 

It’s-a me, Mario! 

The European Central bank kept interest rates unchanged but in a press conference following this decision, ECB President Mario Draghi made it abundantly clear to the markets that they were ready to cut rates and increase asset purchases to facilitate a “highly accommodative” monetary policy given the EU’s essentially nonexistent inflation and slowing economy. Draghi voiced concerns on the outlook getting “worse and worse” because of global trade tensions and Brexit issues.

Moral of the story: It doesn’t bode well for market confidence when the central bank president is talking about a deteriorating outlook. While this latest US GDP report doesn’t warrant the US Fed to cut rates in July, the FOMC might be under pressure to lower rates just because of the rhetoric from other central banks around the world – if US rates remain at current levels while other central banks continue to cut rates, it puts the US at a competitive disadvantage. 

Earnings are here (part 2) 

Wow big week for earnings! We heard chatter from almost all sectors this week. Notable manufacturing giants (like Caterpillar) reported weaker than expected results because of trade tensions with China. Tech giants (Google parent company Alphabet and Amazon) reported mixed results amid chatter of regulatory risk – Alphabet absolutely crushed it, again, while lower than expected growth for Amazon Web Servicesbusiness sent Amazon’s stock price down on the release. A big silver lining from this week, however, was chipmakers (Texas Instruments and Intel) reported better than expected results and outlooks, which is great to see given this sector tends to be a leading indicator of the economy. 

Moral of the story: About 44% of the S&P 500 companies have reported earnings so far and 77% have exceeded expectations, which is higher than the average over the last five years. Earnings have declined by 2.6% compared to last year – if this numbers remains negative by the time we’re done with earnings season, it’ll be the second consecutive quarter of declining earnings, which hasn’t happened since 2016.