Growth Worries Replace Debt Fear

It is amazing to see how fast the markets have started to look past the Debt Deal even as it has yet to become to the law of the land. We will likely get the President’s signature on the bill after the Senate passes it later today; the House passed it Monday evening.

With default no longer a concern but a rating downgrade that may still be in the cards, stocks have moved on to fretting about the growth question. And there are plenty of reasons for investors to keep an eye on the U.S. economy’s growth outlook.

The market was looking for a rebound in economic growth in the back half of the year after the first half fell victim to what appeared to be temporary factors such as high gasoline prices, the Japan disaster and unusual weather. Friday’s GDP report showed us that growth in the first half of the year was even weaker than what we thought we had.

This meant that the U.S. economy has entered the second half of the year with a lot less momentum than all of us had expected. Add to this the weak July ISM Manufacturing report from Monday, and we have a less than reassuring start to the third quarter.

Will GDP growth expectations for the third quarter, which currently remain above 3%, come down in the coming days or we will start seeing evidence of above-trend growth in the days to come? It is hard to answer that question with any level of certainty at this stage. The July non-farm payroll numbers coming out this Friday may help a little in answering it. But my feeling is that we may have to wait a bit longer than that.

In contrast to the erratic behavior of the economic recovery since the end of the Great Recession in the summer of 2009, the corporate earnings recovery has been a standout performer. We are still going through the second-quarter reporting season, but I have no hesitation in saying that earnings reports in the first half of the year have been significantly better than what the underlying economy has done. Given this track record, it may not be unreasonable to extrapoloate this performance to the back half of the year.

We are more than two-thirds done with the second quarter earnings reports, but we had results from a handful of important companies this morning. Drug giant Pfizer (PFE) beat EPS expectations by a penny on lower taxes as revenue came inline with expectations. Coach (COH), the handbag maker, came ahead of EPS expectations on inline top-line results. Archer Daniels Midland (ADM) missed earnings expectations as revenue gains were offset by compressed by processing margins.

About Sheraz Mian 45 Articles

Affiliation: Zacks Investment Research

Sheraz Mian is the Director of Research for Zacks.com.

Visit: Zacks Investment Research

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