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Will today’s release of second quarter GDP clarify the strength of the economy?   In my view earnings have been mixed even as the overall data is suggesting greater strength than most had anticipated.

With earnings season almost half way through, more than 80% of the S & P 500 companies have posted profits that beat dumbed down expectations.  Almost 60% topped sales estimates.  For the period, profits are expected to decline by 4.5%, the fifth consecutive quarterly decline and longest stretch since 2009.

Many have commented stocks are overvalued or may even be in bubble territory.  While I do believe the indices—indices dominated by mega capitalized companies that have been a direct beneficiary of the proliferation of ETFs—I do not believe the typical company is over valued.

Reiterating a dated Goldman Sachs report, the difference in valuations between large cap growth and the value/small cap companies is at the greatest disparity in at least 15 years and in some regards the latter representing the greatest value since at least 1980.

In some regards there has been a nascent transition to value/small cap.  Will the transition commence in earnest, the result of growth greater than 3%?

Second quarter GDP is released at 8:30 and consensus is estimating a 2.5% growth rate, a 4.4% increase in personal consumption and a 1.7% gain in core PCE (inflation).

I will argue if the data indicates accelerating growth and if earnings growth continues for the value/small caps, this nascent transition may begin in earnest.

Next week the second and third tier companies begin their quarterly earnings announcements.

Commenting briefly about yesterday’s market activity, all markets were essentially flat.

Last night the foreign markets were mixed. London was down 0.15%, Paris up 0.09% and Frankfurt up 0.35%.  China was down 0.48%, Japan up 0.56% and Hang Sang down 1.28%.

The Dow should open quietly lower as the markets await more earnings reports and data on economic growth.   The 10-year is off 6/32 to yield 1.53%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.