The US economy is in its 10th year of expansion and there is no sign that it's slowing down. The US Commerce Department reported today that GDP rose to an annualized 3.2% in Q1 (January to March), adjusted for inflation and seasonality, marking it the strongest first quarter in 4 years. This was propelled by a dovish Federal Reserve, which has allowed the economy to heat up just a little more with their “easy money” rate outlook. Inflation was still reported below the Feds 2% annual threshold which is good news for borrows with no change in the Fed's rate stance.
Domestic spending was weak this quarter but net exports and inventory investment both rose considerably driving the solid Q1 GDP growth. Weaker than expected consumer spending combined with a consistently low unemployment means to me that domestic consumers were hesitant to spend in Q1 with the equity market volatility and international trade uncertainty. Now that both of these concerns have subsided US consumers may be ready to consume and the increased inventory investment by businesses are ready for this increase in consumption.
Equity Market Outlook
All of these are leading signals of continued economic expansion combined with the equity market having one of the best quarter in almost a decade. Q1 earnings are about half way over with 46% of the S&P 500 having already reported. This quarter so far has reported the 2nd most earnings beats in 5 years. This is due to the conservative estimates that analyst were submitting as a result of the economic uncertainties domestically and abroad. Year-over-year growth was somewhat muted this quarter though, with earnings up only 0.5% on 3.7% revenue growth. This can be partially explained by the boost in corporate profits in 2018 caused by the corporate tax cut.
Q2 estimates are expected to have negative earnings growth year-over-year. I predict these estimates will adjust upward as earnings continue to be released and positive sentiment is infused back into the markets. The NASDAQ index hit new highs this week and the S&P 500 closed today 1 point away from its all time high.
Biggest Earnings Surprises
Amazon (AMZN - Free Report)
Amazon beat earnings by 53.8%, when they released Q1 results yesterday, posting the largest profits since their inception. This gargantuan company has been able to consistently beat earnings for 7 consecutive quarters. AMZN ended the day up 2.54%, achieving 30% returns for investor so far this year. Their Amazon Web Services (AWS) continue to be the driving force in their bottom line growth. Analysts continue to raise EPS estimates pushing AMZN to a Zacks Rank #2 (Buy).
Ford (F - Free Report)
Ford released earnings yesterday after market close reporting $0.44 EPS beating the extremely conservative EPS estimates of $0.26 by 69%. Ford is up about 11% for the day and over 40% for the year so far. The number of SUV’s and trucks sold increased by 5% and 4.1% respectively. These two segments are the bread and butter of Ford making up over 80% of the vehicles sold. Small cars took a hit this quarter being down over 23% YoY. I attribute this to lower gas prices causing people to move to larger vehicles. I see this automotive win as a signal that US consumers are still willing to spend despite concerns in the market and economies abroad.
Tesla (TSLA - Free Report)
Tesla has gotten hammered this year so far with profits turning from 2 positive quarters to a hard negative Q1. Tesla reported an EPS of -$4.10 compared to the -$2.51 estimate, missing by 63%. Revenues were also reported very soft missing the target by 21%, but making year-over-year gains of 33%. This considerable loss was substantially due to less than expected sales on the Model X and the Model S. Tesla’s Model 3 still remains the most popular car in the United States delivering about 51,000 units this quarter. Overall revenue from automotive sales was almost cut in half from Q4. TSLA has stumbled 28.7% this year so far, and is currently trading at its lowest price in 2 years. Because of the cyclicality of this stock I would consider buying this stock new lows, maybe the $200 range if TSLA keeps sliding, wouldn’t be a bad move if you are optimistic about consumer discretionary spending for the remainder of the year. Since analysts have all been downgrading this stock’s future earnings estimates by a significant amount the stock earns its place on Zacks rank #5 (Strong Sell).
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