Update on Recent Economic Data & Earnings

The initial estimate for Third Quarter GDP was released this morning, and the U.S economy expanded 3% for the second consecutive quarter. This exceeded economists’ estimate of 2.6% growth and marks the best back-to-back quarters of GDP growth since 2014. Consumer spending, which represents nearly 70% of the economy, grew higher than expected (2.4% vs 2.1% estimate). Furthermore, business investment grew again during the quarter, as equipment investing rose nearly 9% for a fourth consecutive quarter of growth, the longest streak since 2014. These figures indicate resilient demand from both consumers and businesses despite the impact of hurricanes Harvey and Irma. This report was the first of three GDP estimates, with the next two coming in November and December, so we will be watching for any meaningful positive or negative revisions.

A separate report on Friday showed consumer sentiment rose this month to the highest level since the start of 2004. Furthermore, manufacturing and new home sales data surprised to the upside this week. The recent data points towards continued growth here in the U.S., which should allow the Federal Reserve to raise interest rates later this year. In fact, market expectations have climbed near 90% for a quarter-point rate hike at their upcoming December meeting. On the earnings front, more than half of the companies in the S&P 500 Index have reported their Q3 earnings, with nearly 80% beating estimates. More importantly, we have seen a third consecutive quarter of strong earnings growth, with the average growth coming in close to 9% after back-to-back double-digit gains for the previous two quarters.

Positive economic data here in the U.S. coupled with another strong earnings season have propelled stock markets higher, as the Nasdaq, S&P 500 and Dow Jones Industrial Average pushed past all-time highs this week. We believe the probability of recession remains low, so markets have the potential to move higher given the current fundamentals. However, clients with near-term liquidity needs may want to raise their cash reserves now by locking in gains with markets trading past all-time highs. We will be monitoring economic data as we head into the end of the year to look for signs that the economy may be cooling off. However, we are encouraged by the recent data and remain overweight stocks across our model portfolios at this time