Good News Abounds for the Economy, but Markets Remain Mellow

A blockbuster burst of GDP growth and huge corporate earnings did little to spur the bulls on Wall Street this week, who seemed more inclined to “sell the news” than buy any more of the rumor.

American flags hang outside of the New York Stock Exchange on Feb. 16 in New York. (AP Photo/Frank Franklin II)

MANHATTAN (CN) — Amazing GDP growth, tremendous corporate earnings and consumer spending not seen since the early 1950s: what should have shattered markets was merely a blip on most investors’ radar this year.

By the end of the week, the Dow Jones Industrial Average lost 164 points, giving back gains from earlier this week and then some. The Nasdaq composite and S&P 500 also did not see major growth this week; the former dropped 54 points and the latter gained just one point.

“Beating the last quarter’s earnings estimates is one thing, but the outlook for the year and beyond is ultimately more important,” said analyst Christopher Crooks of Tower Bridge Advisors. “Price increases by companies related to raw material inflation and supply chain constraints lie ahead, as well. Markets may take a pause after a strong start to the year.”

The biggest economic news of the week was the fact that real gross domestic product notched a 6.4% increase last quarter, according to the Bureau of Economic Analysis, only slightly below what many analysts had predicted. The gains were driven mostly by the 10.7% increase in consumption and built on the fourth quarter of 2020’s 4% increase.

The GDP report included other nuggets of good news, including that business investment increased nearly 10% last quarter and final sales to domestic purchasers — a metric that gauges GDP without including net exports or inventory investment, and which some experts see as a good barometer for economic strength — expanded 9.2%. Personal savings also nearly doubled last quarter, hitting $4.1 trillion compared with $2.25 trillion in the fourth quarter of 2020.

“Looking ahead, we foresee the U.S. economy’s spring bloom turning into a summer boom,” reads an analysis by Oxford Economics staff. “While real GDP remained 0.9% below its pre-Covid level in Q1, we believe it has now recouped all its recession output loss and we expect real GDP growth above 13% annualized in Q2.”

Boussour predicts that a massive return in consumer spending will grow the U.S. economy by about 7.5% in total this year, its strongest performance since 1951. Other analysts, like those at the Dutch multinational finance firm ING Group, now predict the trend in GDP growth will outpace original expectations before Covid-19 struck.

“The pre-crisis growth rate was unusually weak rather than unsustainably strong,” wrote Neil Shearing, chief economist at Capital Economics, in an investor’s note earlier in the week. “While the finances of some households and businesses have clearly been hit hard, in aggregate, at least, private sector balance sheets are stronger now than they were before the pandemic struck.”

Others believe the Biden administration will do what it can to keep the green shoots popping up, at least through most of 2022.

“Bottom line, government transfer payments and the economic reopening helped to goose GDP and that trend will continue in the coming quarters,” said Peter Boockvar, chief investment officer at Bleakley Advisory Services, noting the length of the boom might depend on what tax increases the White House rolls out. “As for 2022, the question is what fiscal cliff are we going to get, but be sure that the party in power will spend what they can in order to keep growth going up until the midterm elections.”

Another lingering concern is inflation, which rose along with GDP last quarter, from 1.4% to 1.5%. However, many investors and regulators seem little concerned about inflation just yet.

During a conference call with reporters earlier in the week, Federal Reserve Chair Jerome Powell said the central bank has no plan to taper its purchases of bonds and mortgage-backed securities.

“That time is not now,” Powell told reporters. “We’ve had one great jobs report, it’s not enough. We’re going to have to see more data.”

Unemployment data also keeps pointing in the right direction, with 553,000 initial claims filed the week ending April 24 compared with 566,000 claims the previous week. As more cities and states lift restrictions, that number is expected to continue downward. However, more than eight million Americans remain out of work due to the pandemic.

Another big week of corporate earnings also reflected the boost in the economy, with many companies reporting high marks not seen for nearly a decade.

For example, Deutsche Bank’s pre-tax earnings of 1.6 billion euros last quarter was its highest since 2014. The German bank’s revenue grew 14% since the fourth quarter of 2020, eclipsing analyst expectations. 

Electric car manufacturer Tesla also boasted a huge increase in revenues, reporting a 74% increase to hit $10.3 billion last quarter. The net income attributable to common stockholders grew 2,638% last month. Some of the revenues were due to the company’s sale of bitcoin, which Telsa — and CEO Elon Musk — announced it purchased earlier in the year.

In the world of technology, earnings continued to balloon. Apple posted a whopping 54% year-over-year increase in its revenue, from $58.3 billion at the end of the first quarter of 2020 to $89.5 billion last quarter. The company saw a huge ramp-up in revenue among its Mac and iPad segments, each netting at least a 70% boost.

“Apple is in a period of sweeping innovation across our product lineup, and we’re keeping focus on how we can help our teams and the communities where we work emerge from this pandemic into a better world,” CEO Tim Cook said in a statement.

On Friday, Amazon reported that it more than tripled its profits last quarter, posting $8.1 billion in net income last quarter compared with $2.5 billion in the first quarter of 2020. The company also nearly doubled its operating cash flow in that same period, and showed a 44% increase in year-over-year net sales.

For Microsoft, whose third quarter just ended, things were nearly as rosy, with revenue increasing 19% year over year while its net income rose 44%. A good chunk of the company’s success during the pandemic has been due to its cloud segment, though its personal computing segment also rose 19% last quarter. 

Google’s parent company, Alphabet, also beat most analyst expectations when it showed a 34% increase in its revenue, from $41 billion at the end of the first quarter of 2020 to $55 billion last quarter. The company’s net income nearly tripled during that same period, from $6.8 billion last year to $17.9 billion at the end of 2021’s first quarter.  

The company had suffered a steep drop in advertising revenue when the pandemic struck, but it quickly made back those lost dollars by the midpoint of 2020, climbing out of the hole and hitting a high point not seen in several years.

According to analysis by FactSet Research, more than three-quarters of the companies listed on the S&P 500 have so far, for the first quarter of 2021, reported revenues nearly 3% above analyst estimates on average.

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