What to watch
What gives? Profit growth pops as GDP stalls
In the first three months of 2017, U.S. companies grew profits at the fastest past since late 2011. But U.S. economic growth downshifted to 0.7%, its slowest quarterly growth rate in three years.
After strong earnings from Google parent Alphabet and online retailer Amazon.com, the S&P 500 stock index ended the week on pace for earnings growth of 13.6% in the first quarter of 2017. That’s nearly double the 8% growth in the final quarter of 2016 and best since the third quarter of 2011, earnings tracker Thomson Reuters says
What gives? How can companies grow their profits when the economy delivers a dud performance and much of the weak growth is due to American consumers spending less?
Earnings and GDP don’t always move in tandem, David Bianco, chief investment strategist, Americas at Deutsche Asset Management, explained in a report. Earnings growth and economic growth, he says, are based on “very different calculations.” Other key differences: About 40% of profits for S&P 500 companies are generated abroad. The S&P 500 is also “more sensitive to manufacturing and investment spending than the U.S. economy,” which is impacted more by consumption spending and services.
Oil prices have also doubled since a year ago, powering the energy sector to quarterly profit growth of 653%. And tech is booming (18% profit growth).
The takeaway? “S&P (earnings) is not GDP,” Bianco wrote.