Not Much To Like About Today's GDP Report

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Includes: AGG, IVV, SPY
by: William Trent, CFA
First-quarter growth weakest in over 4 years:

U.S. economic growth in the opening quarter this year was the weakest in more than four years as businesses sold off inventories and Americans imported more foreign goods, the government reported on Thursday.

Tell me about it. There wasn’t much to like in the report.

Growth in corporate profits is evaporating. Given that the reasonableness of current P/E valuations is dependent on the historically high 'E', this should concern stock market participants.

corporate profits

Corporate profits also, not surprisingly, tend to be correlated with business spending on technology. Hopes for a Microsoft (NASDAQ:MSFT) Vista-inspired tech spending resurgence appear to have been dashed. While bulls argue that lower profits will require tech investments to spur productivity, the recent trend is for companies to do more with less. Therefore, I’d argue that there will be a smaller share of the smaller profit pie going to tech.

tech spending

While consumption spending did rise as a contributor to GDP, the drag on profits may mean more layoffs are in the pipeline, which in turn could put pressure on that consumption.

gdp components

I’ve said before that betting against the American consumer is always a long-shot. At the same time, though, I’d be inclined to at least hedge any bet on continued strength.