by Scott Krisiloff, CIO, Avondale Asset Management
The Dow hit 22,000 this week but the commentary that we’re reading is less exuberant than the market would suggest. Many CEOs are relatively subdued about the environment. Considering that nominal GDP growth is below 4%, maybe that shouldn’t be too surprising.
A lot has been made of earnings growth this quarter, but it’s worth remembering that when the final results are in it’s very possible that S&P 500 earnings won’t break the quarterly record set in 3Q 2014, almost three years ago. So far earnings have only rebounded from a significant decline. However the S&P 500 has climbed 20% since then.
The Macro Outlook:
If you cut through the noise, US growth is a little softer
“If we look at the macro environment, the economies around the world we’d say are mixed but in aggregate, are okay to good. FX headwinds have subsided. Energy markets have recovered some and certainly stabilized. Raw materials, though, are rising and creating some short-term margin pressure but we believe are manageable over the year…If you cut through the noise, U.S. growth is a little softer.” —Ecolab CEO Doug Baker (Business Services)
Activity remains mixed
“Overall, I’d say industrial activity remains weak with mixed activity across the remainder of what we call nonresidential construction segments…growth rates for most construction markets are slowing, and growth in the office construction is also beginning to moderate somewhat. Large industrial project activity continues to be weak. The manufacturing category, as a key indicator of the C-30 report showed through April and May, down some 8.5%. We’re also seeing somewhat slowing growth in housing starts” —Eaton CEO Craig Arnold (Industrial)
Expectations have declined
“Industrial production and retail are still growing, although at a slower pace than originally projected…the forecast for B2B, if you go back earlier in the year to today, is not quite as strong because of retail sales and also because industrial production forecasts were higher even three months ago to where they are today.” —UPS (Package Delivery)
Office leasing has been a little weaker than CBRE expected
“Even though the economy is generally doing nicely, there is a couple of things going on. In general, corporations are being very careful about costs. We are doing it and so are the other big corporations around the U.S. and around the world. And secondly, in a few markets, there have been limited circumstances where leases would have otherwise gotten done, but there was inadequate big blocks of space to get them done” —CBRE CEO Bob Sulentic (CRE Broker)
Restaurant spending has been decelerating
“in the U.S. and just about any other market we’ve studied, there’s been a decades-long trend for growth away from home, food and beverage consumption…However, in the past year, we’ve seen some pullback from that trendline.” —Starbucks CSO Matthew Ryan (Restaurants)
Not everyone is gloomy though