First Release of Q1 GDP & Update on Earnings

The U.S. Commerce Department released their initial estimate of Gross Domestic Product (GDP) for first quarter and although the 2.3% growth rate was lower than the 2.9% growth rate the economy achieved in the last quarter of 2017, it was above analysts’ expectations of 2% growth. In fact, it was the best Q1 growth figure since the first quarter of 2015, with the data reinforcing investor expectations for the Federal Reserve to raise interest rates again in June. Consumer spending grew for the quarter, albeit at a slower pace than last year. Fed officials and market economists believe this to be temporary, as tax cuts, income gains and a solid job market will help propel spending later this year. Business investment and spending on nonresidential structures and intellectual property accelerated in the quarter, which helped offset the slowdown in consumer spending. The data suggests that the economy is not slowing down, but growing at a moderate pace which we will monitor as additional data on Q1 GDP is released in May and June

A separate report released this morning from the Labor Department detailed a higher than expected rise in the employment cost index, which measures both wages and benefits. Additionally, private sector wages and salaries rose nearly 3% from a year earlier, the strongest rate of growth since 2008 as shown in the graph below. This, coupled with a 2.5% annualized increase in the Personal Consumption Expenditures (PCE) Index which is the Federal Reserve’s preferred measure of inflation, suggest there may be four rate hikes this year instead of three. The implications of higher interest rates continue to weigh on equity markets, despite Q1 earnings season being one of the strongest we’ve seen in years, as the Dow and S&P 500 remain in negative territory for the year. However, more companies in the S&P 500 are beating earnings estimates than ever before, with over 80% of the companies who have reported so far beating estimates by an average of nearly 8%. We believe this supports our view that the underlying economic fundamentals remain strong and can drive market appreciation this year, but fears over rising interest rates may result in continued volatility for the foreseeable future.