US market performance
The US economy (SPY) (QQQ) has continued its moderate growth pace with final revisions for 4Q16 GDP at 2.1% compared to 3.5% in 3Q16. Growth continues to be supported by strong consumer spending, resulting in decent revenue growth in 1Q17 in the S&P 500 index. But the recent fall in business fixed investments could be a sign of risk averseness to increase capital expenditures.
In the graph below, you can see the scorecard of revenue growth across sectors for the S&P 500 in 1Q17.
Revenue growth in 1Q17
The strong earnings results show that revenue gains are beating expectations, a trend consistent with a pickup in growth. In terms of sales, about 64.0% of the companies in the S&P 500 index (SPX-INDEX) are reporting actual sales above estimates compared to the five-year average. Overall, companies are reporting sales that are 0.80% above estimates, which is also above the five-year average.
Soft economic data suggest an optimistic outlook that will rely heavily on the ability of the Trump administration to push forward with tax reforms and infrastructure spending. Also, several positive macroeconomic factors are driving the markets in April 2017:
- unemployment rate falling to a ten-year low
- Services PMI (Purchasing Managers’ Index) at 57.5 in April, exceeding market expectations
- lowest trade deficit in the last five months
If we look at the S&P 500 index, technology sector companies and industrials are providing most of the growth. However, defensive sectors such as telecommunication companies and discretionary stocks are trailing the other sectors.
The S&P 500 information technology sector has risen about 10.0%, making it the best-performing sector in 1Q17 and so far in 2017. The technology sector is expected to benefit significantly from tax reforms and regulatory loosening. Major technology (XLK) stocks, including Facebook (FB), Google (GOOGL), and Microsoft (MSFT), reported strong earnings growth in 1Q17, which has supported the rally as of May 2017.
In the next part, we’ll look at President Trump’s expected tax reforms.