S&P 500, Nasdaq hit record highs on earnings, strong GDP growth

Emotional control is the most essential factor in playing the market. Never lose control of your emotions when the market moves against you. Don’t get too confident over your wins or too despondent over your losses. – Jesse Livermore, American investor and one of the greatest stock traders of all time

With continued strong corporate earnings and better than expected economic growth in the first quarter, it should be no surprise that stocks rose again last week. Although the Dow Jones Industrial Average dipped 16 points, both the S&P 500 Index and the Nasdaq Composite Index closed at record highs on Tuesday and again on Friday. Fears that the U.S. economy was slowing proved to be unfounded as GDP growth in the first quarter was 3.2%, topping expectations of 2.3% by economists. After lackluster GDP growth of 2.2% in the fourth quarter, most economists thought that the Federal government shutdown in January along with frigid winter weather and weakening global growth would have an adverse effect on growth in the first quarter. Forecasts of flattish GDP growth were widespread and recession fears increased as the yield curve between the 3-month Treasury Bill and the 10-year Treasury Note briefly inverted. But earnings are responsible for driving stock prices and so far most companies are delivering on both the top and bottom lines in their quarterly profit reports. About 45% of S&P 500 companies have reported their earnings results as of Friday and nearly 80% of them have beaten analysts’ estimates. For the most part, companies are also providing favorable guidance on their prospects for the balance of the year. Last week Amazon and Microsoft, two heavyweights in the technology sector, reported stronger than expected revenue and earnings as Amazon’s profit more than doubled and Microsoft saw its market capitalization top $1 trillion. But better than expected earnings results have not been confined to the technology sector as companies such as Coca Cola, Procter & Gamble, Caterpillar, Ford and Lockheed Martin also posted strong results. Before this earnings season began, expectations were for a decline in profits of about 4%, but projections now indicate that earnings growth could be flattish to slightly positive.

Last Week

It was a mixed bag for housing data last week as existing home sales in March fell nearly 5% while new home sales rose to a 16-month high. Durable goods orders in March rebounded strongly after declining in February and core capital goods orders posted their biggest gain in eight months, a sign that business spending will likely increase in the months ahead.

For the week, the Dow Jones Industrial Average lost 16 points to close at 26,543 and the S&P 500 Index gained 1.2% to close at 2,939. The Nasdaq Composite Index rose 1.9% to close at 8,146.

This Week

This will be a busy week for both economic data and quarterly earnings as about 150 S&P 500 companies are scheduled to report. On Friday, the April employment report will be released and expectations are for 175,000 new jobs to be created and for the unemployment rate to remain unchanged at 3.8%. March factory orders and construction spending are expected to increase modestly while the April ISM manufacturing index is forecast to be flat but comfortably in expansion territory. The Federal Reserve’s preferred measure of inflation, the core personal consumption expenditures (PCE) index, is expected to have risen by only 1.9% in March, slightly below the Fed’s target rate of 2%.

The Federal Open Market Committee (FOMC) meets this week and is widely expected to leave its key benchmark interest rate unchanged at between 2.25% and 2.50%.

Among the most notable companies scheduled to report first quarter earnings this week are Alphabet (Google), Apple, Automatic Data Processing, Qualcomm, McDonald’s, Eli Lilly, Merck, Pfizer, Amgen, CVS Health, General Electric, General Motors, Johnson Controls, MetLife, Berkshire Hathaway and ConocoPhillips.

Portfolio Strategy

This could be a pivotal week for the stock market as about 150 S&P 500 companies report earnings, the Federal Reserve announces its monetary policy decision and the government releases the employment report for April. A number of large pharmaceutical companies will issue their profit reports at a time when the health care sector has been the worst performing sector of the market. The weakness has been due to calls for “Medicare for All” plans by some Democrats which could destabilize our current health care system. The Federal Open Market Committee (FOMC) also meets this week and although interest rates are expected to remain unchanged, the Fed could alter its dovish tone in light of the strong first quarter GDP report of 3.2% economic growth. Before the Fed meets on Tuesday and Wednesday, it will get a good read on inflation when the personal consumption expenditure (PCE) index is released on Monday. It’s expected that inflation will remain slightly below 2%, the Fed’s target rate. If that’s the case, the Fed is likely to remain on hold and could even cut interest rates later in the year if global growth remains subdued. The employment report is also one of the most important pieces of economic data and any surprise either up or down could have implications for the Fed and its policy decision. Other risks to the market include unresolved trade talks between the U.S. and China, a reduction in China stimulus and weaker growth in Europe, all of which bear watching and could negatively impact stock prices.