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%.
