Does Q1 2019 GDP Change the Growth Narrative?

A week that was chock full of single-stock volatility from first-quarter (Q1) 2019 earnings reports ended with the NASDAQ Composite (^IXIC) and S&P 500 (^SPX) posting new closing highs on both a daily and weekly basis.

Stocks’ relentless churn higher, despite earnings-induced selling in numerous market leaders, now have Broad Market Averages poised to log their fourth consecutive month of gains this Tuesday.

Of course, the conversation on Friday was dominated by the Q1 2019 gross domestic product (GDP) report showing the U.S. economy grew at a stunning +3.2% in what has proven to be the slowest quarter of the year for most of the last decade.

Prior to the 8:30 am release, investors were bracing for what was likely to be a rough end to the week. Earnings reports from technology bellwether Intel (INTC) and ExxonMobil (XOM) already had two market leaders, trading lower (INTC by -10%). This, the day after 3M (MMM) — a third Dow Jones Industrial Average (^DJI) member — had its worst daily decline (-13%) since October 1987.

While the GDP report was not without its blemishes, and of course a bevy of naysayers, it highlighted the rapid improvement in the economic data over the prior six weeks.

As recently as the second week of March, the consensus forecast for Q1 GDP was very near +1.0%. Yes, the +3.2% print was aided by the lowest U.S. trade deficit number in 8 months, and a higher than average inventory build.

But there were also shortfalls from consumer spending, business investment, and housing, all of which are likely to improve the next few quarters providing potential to pick up the slack should data from trade and inventories revert.

The upside surprise from GDP seemed to be just what investors needed to “look past” the downside volatility from Q1 corporate earnings. During a week when 25% of the S&P 500 reported earnings, investors were not only punishing companies that missed or lowered guidance but also also selling into any strength from those with good earnings.    

Now, it’s likely the “late cycle“ narrative on the economy will get a closer look. At least on Friday, the Macro view overshadowed the $5.58 decline to $52.43 in Intel and a weak semiconductor sector, following their disappointing earnings and lowered revenue guidance for 2019.  

The same was true for mass market retailers.

Walmart (WMT), was down $2.00 to $101.53 and Target (TGT) fell $4.62 to $77.12 in response to the one-day-delivery initiative from Amazon (AMZN), which was up $48 to $1950.61.

Energy stocks  were also mostly lower as crude oil was -3%, its largest decline this year.  The oil price decline was widely attributed to President Trump jawboning OPEC to increase supply after announcing the U.S. would begin to sanction countries buying Iranian Oil. Weaker than expected earnings from Exxon (XOM) -$1.73 or -2% to $80.49 likely contributed to the selling in energy stocks.   

This week, we’ll get another heavy dose of corporate earnings reports with Q1 results coming in from Alphabet (GOOG), ConocoPhillips (COP), Eaton Corp (ETN),  General Motors (GM), and Apple (AAPL) by the end of the day on Tuesday.

There is also a busy calendar of fresh data on the macro economy. We’ll start right out this morning with March data on Personal Income and Spending.

On Tuesday, we’ll get the heavily-watched Employment Cost Index for Q1 from the Labor Department, followed by March data on pending home sales from the National Association of Realtors (NAR) and a preliminary reading on consumer sentiment from the University of Michigan’s Survey of Consumers for April.

The stellar Q1 GDP report won’t change any of the specifics from earnings reports this week and it’s doubtful to have an impact on forward guidance, as that script is already written. The most interesting dynamic will be how sensitive investors are to a stronger than expected economy in their post earnings behavior.