Real Gross Domestic Product for the third quarter was revised upwards to an annualized growth rate of 3.2%. Today’s figures portray that economic growth is accelerating at its best pace since 2014. Contributions to GDP expansion were broad-based, led by consumer consumption, private investment, exports and federal government spending on national defense. All four major categories contributed to the advancement.
So, what does this mean for equities moving forward? Stocks have staged an impressive rally since Election Day, with the DJIA up over 5.00% for the month of November. Of late, naysayers have been painting a dire picture for stocks, stating that a correction or even worse is looming. Optimists point to the facts that the Trump administration is poised to lower corporate and personal taxes to further buoy shares. There’s talk about repatriating billions of overseas profits back to the US, which can be multipurposed into private investments, dividends, share repurchases and taxes.
Skeptics would add that markets have already priced this into stock valuations, which leaves earnings. Warren Buffett says, “Markets are a voting machine short-term, and a weighing machine over the long-term.” Profits are known to be the lifeblood of the stock market. Corporate profits have decreased in five of the past six quarters, until now. Q3’s turnaround is impressive, with corporate profitability rising a whopping $133.8 billion. That equates to over $900 per capita for every working person in America. Will corporate profits resume their march forward? I’ll address this question in short order.
Upstream oil & gas companies will get a boost in earnings if commodity prices are higher at year-end. Higher oil & gas prices will cause those proven reserves that were reduced last year because of "economic limits" to be added back. Higher proven reserves combined with previously taken impairment charges will lower DD&A rates going forward and increase reported earnings in 2017. GAAP accounting rules for upstream companies are very confusing to most investors, but EPG members are smarter than most investors.