The spring saw a bit more activity than the winter as the second quarter Gross Domestic Product (GDP), a measure of goods and services produced across the economy, grew at a 2.3% annualized rate. The first quarter’s number was revised upwards from negative 0.2% to a positive 0.6% annualized rate, putting the first half of 2015’s “pace” at a 1.5% GDP expansion. Should this year finish at 1.5% expansion, it would represent very modest growth compared to the last few years, when GDP grew by 2% annually. In looking into the numbers, consumer spending (which makes up nearly 2/3 of economic output) rose 2.9% in the second quarter. Residential investment grew at a strong 6.6%, though short of the previous two quarters that saw at least 10% growth. Another positive sign was government spending, which rose into positive territory and shows that state and local governments are beginning to spend again. The detractors for the quarter were business spending, which detracted from GDP for the first time since 2012 and nonresidential fixed investment, which retreated 0.6%. Many economists attribute the weak first half of the year to bad weather and port strikes on the west coast. Most economists are predicting growth will pick up in the second half of the year. However, the lower growth numbers are unlikely to be weak enough to delay the Federal Reserve from raising short-term interest rates. The current market consensus remains for a September rate hike.
M&A Activity Picks Up:
On Monday, it was announced that AT&T (T) closed on its $49 billion acquisition of DirecTV (formerly: DTV). This comes after more than one year of regulatory review and results in the largest television company in the U.S. Last month, Anthem (ANTM) proposed an acquisition of Cigna (CI), a move that would combine the second and fifth largest health insurance companies. After a slow start to 2015, we have seen mergers & acquisitions (M&A) begin to pick up in the last few months. In June, M&A activity was up 19.3% over May, though the aggregate amount paid for the acquisitions was larger in May.
Private equity activity also saw a 22.9% increase in activity from May to June. Many U.S. companies are being acquired from firms abroad, with United Kingdom firms leading the pack (within private equity). We have also been seeing this same trend among publicly traded companies. At a Congressional hearing this week, Boston Beer Company (SAM) founder Jim Koch testified that a high U.S. tax rate is at least partially to blame for these foreign acquisitions. Last year, foreign takeovers of U.S. companies reached $275 billion, nearly double 2013’s total. For 2015, this number could reach as high as $400 billion, according to a witness who testified before the panel.
As of this morning, 354 companies in the S&P 500 have reported their earnings. Of those 354 companies, 73% have reported earnings above the average analyst estimate, matching the five year average. 52% of the companies have reported revenues higher than the average analyst estimate, which is below the 5-year average.
Mostly due to the energy sector, earnings are down 1.3% over last year, the first year-over-year decline since 2012. Energy companies have reported a year-over-year decline in earnings of negative 57%. Excluding the energy sector, the 354 S&P 500 companies that reported would have a positive 5.4% growth in earnings.
A few highlights from this week were:
Gilead Sciences (GILD) reported that its growth story is still very much intact, as they earned $3.15 per share, much higher than the $2.71 per share that analysts were expecting. Its Hepatitis C drug, Harvoni, had better than expected sales, showing that consumers, insurance companies, and governments are willing to pay what had previously been described as too high of a price because the drug is said to superior to any Hep C drug in the marketplace. Gilead also expects this to continue and raised their full year outlook for the second time this year.
Exxon Mobil (XOM) stated today that its revenues fell 33% year-over-year as a result of lower oil prices. Overall, the company reported a profit of $1.00 per share profit, below the $1.11 per share estimate analysts were expecting. The company also stated they will once again cut its share buyback program to a level of $500 million. In its guidance, Exxon stated they will move to conserve additional cash, as they do not expect a “quick rebound” in crude oil prices.
Ford Motor (F) posted a 44% year-over-year increase in profits on steady demand for trucks and SUVs, likely due to lower gas prices. While revenue declined slightly due to exchange rates, Ford earned $0.47 per share, beating analyst estimates. Ford’s strongest region remains North America while Europe continues to post losses. Ford’s outlook on China was tapered a bit; while Ford likes their long-term outlook, they are predicting flat sales for the remainder of 2015 on a softer Chinese economy.
While there are a large number of companies reporting next week, most are smaller and less followed companies. A few notable companies scheduled to report next week include: CVS Health Corp (CVS), Emerson Electric (EMR), Walt Disney Co (DIS), and Quanta Services (PWR).
Home Ownership Down to Lowest Level in 50 Years:
According to the Census Bureau, the U.S. homeownership rate fell to 63.4 percent in the second quarter, its lowest level since 1967. Higher costs of living accompanied with minimal wage growth have impacted those who can afford to buy a home. Homeownership rates increased in the second quarter for Americans ages 35 and younger, whereas rates dropped for every other age group.
Meanwhile, rentals in the U.S. are at their highest occupancy rate in over 20 years and limited supply will result in rental inflation. On average, U.S. rentals have risen 3.5 percent in the past 12 months compared to the consumer price index (CPI – ex food and fuel) which rose 1.8 percent in same time period. With rental rates expected to rise 5 percent both this year and next year, quickly rising rates could close the savings gap on the costs between rentals and home owners, eventually leading more renters to buy homes. A tightening labor market could also begin to put pressure on wage growth, which could help many first time home buyers.
This publication is provided as a service to our clients and associates of PFA solely for their own use and information. The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified. The content in this publication is for general information only and not intended to serve as individual investment advice. You should seek independent advice from a professional based on your individual circumstances.