GDP set to rebound from early-year freeze

August 03 02:45 2015

As economic bounce-backs go, roaring back from the first-quarter deep freeze, when the economy contracted 0.2%, the first estimate on second-quarter growth set for release Thursday should help put fears to rest. The expected second-quarter rebound looks like it should go a long way toward putting to rest fears that the early-year slowdown was anything more than a pause caused by bad weather, exacerbated by fallout from a West Coast port strike and a super-strong U.S. dollar.AFP 541144118 A UNI USA CA

The median estimate of economists is for growth of 2.5%, Capital Economics says. That’s not quite the 3% pace economists had hoped for heading into the year, but robust enough to put the early-year slump in the rear-view mirror. Since GDP growth is a backward-looking figure, it’s unlikely to have a major impact on the Federal Reserve’s deliberations on when to start hiking short-term interest rates.

But a stronger number — say, in the 2.5% to 2.8% range — is important for stock investors who are looking for positive catalysts to keep propelling the stock market higher in the face of above-average valuations and coming Fed rate hikes.

“The market is looking to confirm the economy is strengthening sufficient enough to produce the earnings growth to warrant higher share prices,” says Mark Luschini, chief investment strategist at Janney. “Stocks are roughly 17 times forward earnings. While not egregiously valued, they’re clearly not cheap. Profit growth has to do the heavy lifting.” And if GDP comes in “closer to 2%, worries could creep in that the economy can’t get traction,” he says.

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