by Peter Jones, CFA
Executive Vice President
Research and Portfolio Management
This week, for the first time in months, tariff news was overshadowed by economic and earnings headlines. Those of us in the business of analyzing the market and economy can agree that this was a refreshing shift. An even more welcome, and somewhat surprising, development is that the S&P 500 has now eclipsed pre “liberation day” levels. In fact, the market has returned more than 14% since April 8. Clearly, the market is pricing in a much less draconian tariff environment than the one unveiled on April 2. This week, the fodder for this narrative came when China announced exemptions on about $40 billion of U.S. imports, representing 25% of all goods sent to China from the USA.
On the economic front, we had an initial look at first quarter gross domestic product (GDP). On an annualized basis, first quarter GDP shrank by 0.3%, representing the first decline in GDP since the spring of 2022. Before hitting the panic button, it is critical to deconstruct the drivers of GDP, which reveal that underlying economic momentum is much better than the headline decline. Some may remember from Economics 101 that GDP is calculated using the following formula: GDP = C + I + G + (X – M). Translation: economic output is measured by aggregating consumption, private/business investment, government spending and net exports. The graph below depicts the growth contribution of these components to the economy in the first quarter.
Source: FactSet
The consumption and investment parts of the GDP formula are the most representative components of underlying economic health. As seen above, both grew in the first quarter and in the case of investment, the first quarter was the strongest growth in nearly 2 years. Critically, imports are a reduction in the measurement of GDP. The 40% drag from net exports was enough to pull the entire GDP number into negative territory. It is not surprising to see a dramatic increase in imports ahead of tariffs. Importantly, the drag from imports in the first quarter should flip to a material tailwind to second quarter GDP. The bottom line from the GDP data this week is that the underlying health of the economy remains intact.
Moreover, employment data this week reinforced the notion of a still healthy economy. The USA added 177,000 net new jobs in the month of April, representing significant upside compared to the 137,000 estimated by Wall Street. Despite tariff uncertainty, federal government layoffs and job losses from high-profile companies such as Nike and Intel, the overall job market is robust.
Shifting from top-down macroeconomic data to bottom-up company topics, we had earnings releases from four members of the “Magnificent 7” this week: Microsoft, Apple, Amazon and Meta. While trillion-dollar club companies have underperformed the S&P 500 this year, down 11% compared to the average stock in the S&P 500 down 2%, the earnings news was better than feared.
Microsoft: Earnings beat estimates by 8%, driven by incredible revenue growth in cloud computing in addition to better margins. As a result, the stock gained 8% on the day of earnings
Apple: Earnings beat estimates by 2%, but cautious commentary around the next quarter iPhone sales led to a 4% decline in the stock price
Amazon: Earnings beat estimates by 16%, driven by margins in their cloud business. Offsetting was, similar to Apple, some cautious commentary around the next quarter. The stock was flat on the earnings release
Meta: Earnings beat by 23%, with upside on both revenues and margins. Additionally, Meta’s forecast for revenue growth next quarter came in above expectations. Meta stock increased 5% on the news
These four companies represent more the $10 trillion in market value and 20% of the S&P 500. Because of the staggering size of these companies, results can cause shifts in overall market sentiment. Seemingly, policy and economic uncertainty had no discernible impact on first quarter results. That said, as illustrated by Apple and Amazon, some of this uncertainty will weigh on results in the current quarter. Moreover, the companies tied closely to consumer spending and consumer goods – Apple and Amazon – are seeing a bit of slowing. Conversely, Meta and Microsoft beat first quarter expectations considerably and continue to see upside in the coming months.
Takeaways for the Week
For the first time in several weeks, tariffs did not dominate the market headlines
First quarter U.S. GDP growth declined, but this was solely because of a pull forward of imports ahead of tariffs
Employment data continues to suggest a healthy economy
Magnificent 7 constituents Apple, Microsoft, Amazon and Meta reported earnings this week and in the aggregate displayed upside compared to expectations