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Earnings won't matter if Q2 GDP disappoints investors

By Peter Kenny, chief market strategist for Global Markets Advisory Group and independent market strategist at Kenny & Co. LLC

This week’s economic calendar will provide investors with two very important data points: the Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday that culminates with an announcement of monetary policy and the initial Q2 GDP reading on Friday. With these two significant data releases on tap this week, it is important to keep in mind that the US equity landscape remains constructive heading into month-end. As legendary strategist Sam Stovall points out, US equities remain the asset of choice for investors. Among rising Q2 EPS estimates, a strong start to earnings season, near-target inflation, constructive economic data and the prospect of a single rate hike for the balance of 2017, it is hard to make an argument against his thesis.

This week’s FOMC meeting and announcement are not expected to provide much in the way of excitement for the Street. The FOMC is widely expected to keep the federal funds target rate range unchanged at 1.00% to 1.25%. Additionally, any mention of the current state of inflation within the economy is likely to be nothing more than what has already been well telegraphed by Fed officials in recent talks. In fact, by all indications, inflation, as stated in the June FOMC statement, is slowing. In July we have seen no noticeable uptick in inflation thus far. As a result, investors are not expecting any move to tighten further in the near-term. Other than a focus on rates and inflation outlook, investors will be keeping a close eye on any further clarification on reducing the size of the balance sheet.

Consumer spending is 70% of GDP. (Source: Getty Images)
Consumer spending is 70% of GDP. (Source: Getty Images)

On Friday, we receive the initial Q2 GDP reading. As you may remember, the final Q1 GDP reading was a rather disappointing 1.4%, though it was revised significantly higher after the initial reading of 0.7%. According to Bloomberg consensus estimates, the initial Q2 reading is expected to result in a significantly more robust 2.6%. The GDP Price Index and real consumer spending verticals in the report are expected to provide mixed signals. In the case of the former, consensus is calling for a tick lower to 1.2% from Q1’s final reading of 1.9%. The real consumer spending data, however, is expected to reflect an uptick from Q1’s anemic 1.1% to 2.8%. If the GDP report is in line with expectations, markets will continue to trade off of earning results. In that event, and given the backdrop for equities, generally speaking and outlined above, the drift higher in prices that we have been treated to in recent sessions remains the path of least resistance.

On the earnings front this week, FANG stocks will dominate. On Monday, Alphabet (GOOGL, GOOG) and Cadence Design Systems (CDNS) will report quarterly results. Later in the week we will also hear from Facebook (FB) and Amazon(AMZN). If last week’s report by Microsoft (MSFT) is any indication of what to expect in the large cap tech space, we may well see both a significant uptick in volume as well as price appreciation.