April 26, 4:00 pm EST
We will get the important Q1 GDP number tomorrow. We’re already seeing plenty of evidence in Q1 corporate earnings that the big tax cuts have juiced economic activity. Not only do we see positive earnings surprises and record margins, but we’re getting positive revenue surprises too. That means demand has not only picked up, but it has exceeded what companies and Wall Street have expected.
Tomorrow will be another big piece of evidence that should prove to markets that the economy has kicked into another gear, and that an economic boom is underway. Remember, we looked earlier in the week at the sliding expectations for tomorrows growth data. Reuters poll of economists has pegged Q1 GDP expectations at 2%.
Remember, we’re coming off of two quarters of 3%+ growth. And that was before the realization of big tax cuts, which not only has increased profitability for companies, wages for employees and savings for tax payers, but has fueled confidence in the economy and the outlook. And fuels economic activity.
So, at a 2% consensus view on tomorrow’s GDP number, we’re setting up for a positive surprise on GDP. That should be a low bar to beat. And if we do get a beat on GDP, that should be very good for stocks.
As we’ve gone through this price correction in stocks, we’ve been waiting for Q1 data (earnings and growth) to become the catalyst to resume the bull trend for stocks. And it has all lined up according to script. We’ve gotten big beats in the earnings data, as we suspected. We’ve retested the 200-day moving average in the S&P 500 in the past couple of days, as suspected. And as we discussed yesterday, we have two big central bank meetings (the ECB this morning, and the Bank of Japan tonight) which should calm the concerns about the pace of move in the global interest rate market (i.e. as the ECB did this morning, the BOJ should telegraph an appetite for continued asset purchases – which continues to serve like an anchor on global interest rates).
Bottom line: With a good GDP number tomorrow, we should be on the way to a big recovery for global stock markets, to reflect an economy growing back around trend growth, corporate earnings growing a 20% and a valuation on broader stocks that remains cheap relative to the low interest rate environment.