Grasping for Growth in a Broken Economy

It was a flat market last week with the exception of the Nasdaq, which was up more than 1% thanks to better-than-expected results from tech giants such as Alphabet and large biotech concerns such as Celgene . That the Dow and S&P 500 are a whisper away from all-time highs is quite remarkable. Equities are currently trading at approximately 19x forward earnings, not exactly cheap, especially as this will be the fifth straight quarter that profits within the S&P 500 have declined on a year-over-year basis. Things do not look much brighter in the quarters ahead either. Oil appears as if it is about to go into another official bear market, with crude about 20% below its highs just north of $50 a barrel earlier in June. Don't expect much improvement in energy sector profits given this environment. And one has to wonder whether oil's recent fall will trigger another spike of volatility in the high-yield market like it did earlier in the year. Meanwhile, the overall economy is certainly not much of a tailwind for growth or profits right now. Second-quarter GDP growth just came in at 1.2%, far below the expected 2.6%. First-quarter GDP growth was revised down to 0.8% from an already anemic 1.1%. Even fourth-quarter GDP readings were whacked, moving to just 0.9% from 1.4%. Some pundits will say some of this was caused by inventory liquidation and growth should be stronger in the second half of the year (I would certainly hope so!) While there is some truth to this and consumer spending did show 4% growth in the second quarter, the latest GDP readings are hardly encouraging. One also cannot ignore that business investment shrunk 2.3% in the second quarter after declining 3.4% in the first. Businesses just don't appear confident under the current global economic backdrop and regulatory regime to increase investment, especially in front of an uncertain and rancorous election season. Indeed, I am starting to feel sorry for whoever wins the right to be the next occupant of the White House despite the fact both candidates have sky-high unfavorable ratings. Given where third parties are currently polling, it looks likely that the victor will emerge with 45% or less of the overall vote. Hardly what one would call a mandate. Their honeymoon in office is likely to last less than a typical summer in Siberia. We have come full circle this decade. In 2010 and 2011, an investor wanted to own things that hurt if you dropped them on your foot. Now it seems the only thing producing growth are intangible goods in areas such as pharma, biotech, software and services. Facebook and Google continue to dominate the growing digital and mobile advertising market. Amazon is seeing incredible growth out of its web services business and biotech concerns AbbVie , Amgen and Celgene all reported top- and bottom-line beats last week. You can see this bifurcation in growth of tangible and intangible goods just by looking at the recent results at Apple . Revenue from its iPhones plunged 23% on year-over-year basis. Meanwhile, the company's services revenue was led by its AppStore, which grew 19%. It seems the market is very much like the economy these days. A few concerns are seeing impressive earnings growth while most of the market is treading water or declining. The question is with the S&P 500 at all-time highs, can the rally continue on such narrow breadth and with a broken economy?

Grasping for Growth in a Broken Economy

The bifurcation can be seen just by looking at Apple's recent results.

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