Today’s US GDP revisions showed less strength than headline numbers suggest. Analysts focused on the 6.9% year-on-year increase in pretax corporate profits. That’s a strong number, but it is concentrated in a couple of sectors that may not be able to repeat the hat trick during the remainder of 2017.
The GDP data don’t tell us where the profits came from (that breakdown won’t be available for months), but the distribution of corporate earnings growth across the S&P 500 provides a reasonably good indication. GDP profits and S&P per-share earnings don’t always move in the same direction, but they have shown a close correspondence during the last several quarters (see chart).
Noteworthy is that profit growth was very muted in the consumer sectors of the economy. Overall S&P profit growth was 16.2% year-on-year, but consumer staples showed a 2% decline and consumer discretionary (including autos) grew just 5.4%.
Health care profits were up only 2% year on year. Telecom services showed a huge jump in profits (95%), but that is almost entirely due to merger-related accounting. Telecom operating earnings before special items were flat. That leaves two sectors with big improvements, tech and finance. The financials are coming back from a very low base, and the present softness in interest rates bodes ill for their third-quarter earnings. That leaves tech, which remains the big stock market momentum trade. Google and Facebook are money machines, to be sure, but it’s a slender peg on which to hang a recovery.