The U.S. economy has moved into a stronger growth mode. Even with the negative impact from hurricanes, real GDP growth expanded at a 3.0 percent pace in 2017:Q3, after a 3.1 percent advance in 2017:Q2. This represented the first time since 2014 that the economy registered back-to-back quarterly gains of three percent or more.
In similar fashion, the latest quarterly corporate revenue and profit readings are consistent with the solid macroeconomic reports and the continued strength in the equity market the last several months.
Although monetary policy was held steady following the latest FOMC meeting, the recent economic data support further normalization of both interest rates and the Fed’s balance sheet in late 2017 and 2018. These actions, in turn, could eventually temper returns.
Signs of a Stronger Economy
A robust 8.6 percent gain in business equipment investment, combined with a respectable 2.4 percent increase in real consumption and a 2.3 percent gain in exports were the key catalysts to the continuation of the three percent real growth pace in the third quarter. Moreover, the gain in real GDP would have been even stronger if it were not for the hurricane-induced hit to both business investment in structures and residential investment which fell 5.2 percent and 6.0 percent, respectively. These two components are likely to stage a significant rebound in the next two to three quarters and should be catalysts to a continuation of solid domestic economic activity. A rebound in U.S. capital expenditures has unfolded and business spending could receive an added boost if Congress can pass a tax plan. With wage and benefit costs showing signs of a modest reacceleration and the sub 4.2 percent unemployment rate sparking fears of labor shortages, the Fed is likely to continue to normalize interest rates in late 2017 and early 2018.
Another Quarter of Robust Profits
On a similar note, the latest earnings reports once again revealed upside surprises, confirming that corporate America benefited from the improvement of top line revenues. Through the morning of Thursday, November 2nd, 384 (77 percent) of reporting companies in the S&P 500 index have released 3rd quarter 2017 earnings. Of those, 296 (77 percent) have surprised to the upside on an earnings-per-share basis with approximately 72 percent reporting positive growth. The overall average earnings growth rate is 8.6 percent at this point in the season. The reported sales-per-share figures show that 306 (80 percent) companies have reported an increase in sales and the average sales growth for all reporting companies to-date is 5.72 percent. Interestingly, this fits in line with the rebound in nominal GDP from 4.1 percent to 5.2 percent in the quarter.