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US GDP data better than expected

Joanna Shatney, Head of US Large Cap Equities at Schroders, comments on this week’s US GDP data…

While the Q2 GDP data was better than expected, the absolute level of growth remains low. We are optimistic that GDP growth will accelerate later in the year, after the drag from sequestration and tax increases abate – and with better demand in consumer and industrial activity.  We continue to believe that higher GDP will help corporates drive earnings growth of at least 5-7% this year allowing for further upside potential in equity markets. 

Actual GDP results were stronger than we expected, helped by less of a negative impact from lower government spending – something we would not bet on longer term.  However, upward revisions to previous quarters help to offset some of the subdued quality of the Q2 numbers. 

Employment data to come later in the week will be as important, if not more so, to the growth forecasts for later this year and the direction of the Federal Reserve (Fed) with its Quantitative Easing (QE).  While many expect tapering to begin as early as September, we don’t see them moving in a significant enough way to choke off a modest growth economy in the US.  Overall this continues to be a bullish scenario for equities – with a Fed that will remain accommodative until growth improves.  While the market is at all-time highs, GDP and corporate profit levels are at all-time highs as well.  The US market remains undervalued, particularly relative to bonds.  We continue to be optimistic about US equity returns.

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