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Big Tech is continuing on a role

  • Wednesday, July 10, 2019

Aerial photo of the Silicon Valley in CaliforniaThe US economy has delivered strong growth in Q1 with annual GDP growth hitting 3.2% which is well above the expected forecasts with some analysts predicting only 2% growth. These lower growth predictions were due to the long government shut down which do not appear to have adversely affected the economy.

Much of the market volatility in late 2018 was driven by concerns that the US economic cycle would begin to weaken in 2019. However, the key data is now showing signs of continued strength. The US employment report issued by the US Bureau of Labor Statistics (BLS) showed higher than expected job growth over the first 4 months of the year.

The BLS reported average hourly wages increased by 0.7% in Q1 to 2.8% for year-on-year growth and that the quality of jobs has improved. Wage growth is also ahead of the CPI rate of inflation that stands at 1.9% meaning real increases in take home pay. Both of these factors are positive for consumer confidence and the durability of the current recovery through 2019.

Wage growth is potentially inflationary and also hits corporate profit margins. This may have an impact on equity markets if profit growth is limited. Increased job participation helps improve labour mobility and productivity.

The pace of economic activity, job creation and the potential for productivity gains reduce the chance of an economic downturn. Risks still remain due to the possibility of a prolonged strategic conflict with China over trade, higher oil prices and higher than expected inflation over the summer and autumn.

The Q1 earnings season went better than expected with 80% of the companies in the S&P 500 index posting earnings ahead of analyst forecasts. For example, US banking giants JP Morgan and Wells Fargo both published results well above expectations. Despite analysts writing down profits ahead of a global slowdown, the S&P hit 2900 points on 15th April recovering all of Q4 2018 losses.

The giant technology companies have had an incredible stock market run and QI profit season. Amazon benefitted from a huge rise in profits, making US$3.6bn in Q1 alone. Microsoft reported record results with profits of US$8bn on revenue of US$30bn. Facebook, which has recently fallen from grace, still posted a 26% rise in revenue. There is speculation that both Facebook and Amazon may pay their first ever dividend to shareholders this year. Clearly big tech is continuing on a role.

This is significant to stock markets particularly when these mega companies start to pay out attractive dividends. Dividends have not been a priority for the tech sector in the past but big tech now has the capacity to pay out US$ billions to shareholders over the next decade. As dividends are a major contributor to stock market growth, this could prove to be a major boost for the tech sector allowing it to rival traditional allocation to the oil and pharmaceutical sectors renowned for dividend payment.

There are expectations that US corporate profits will peak in Q3 2019 and then decline in line with weaker growth but not fall into recession.

Increased job participationhelps improve labour mobilityand productivity.

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Chris Davies

Chris Davies

Chartered Financial Adviser

Chris is a Chartered Independent Financial Adviser and leads the investment team.

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