Dow Jones Industrial Average Rose as Earnings, Economy Are Holding Up – Barron's

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Illustration by Michael George Haddad

New Highs. The S&P 500 and the Nasdaq Composite set record closes on strong earnings reports and better-than-expected growth of U.S. economy during the second quarter. The Justice Department approved the merger of T-Mobile US (ticker: TMUS) and Sprint (S), but states still need to sign off. Amazon.com stock (ticker: AMZN) fell on Friday and Google parent Alphabet stock (GOOGL) soared in trading after reporting earnings late Thursday. In today’s After the Bell, we…

  • watch the two major indexes hitting new records;
  • check on how the U.S. economy did in the second quarter;
  • explain why stocks jumped despite a slowing growth.

Decent Growth

Stocks rose despite comments from White House economic adviser Larry Kudlow that he isn’t expecting any major breakthroughs from next week’s trade talks with China.

The Dow Jones Industrial Average added 51.47 points, or 0.19%, to close at 27,192.45. The S&P 500 rose 22.19 points, or 0.74%, to end at 3025.86, a new record high, and the Nasdaq Composite gained 91.67 points, or 1.11%, to close at 8330.21, also a record.

Investors are clearly upbeat, with two indexes hitting new highs on Friday. The Federal Reserve is widely expected to reduce its target interest rates by at least 25 basis points next week. The European Central Bank also confirmed its dovish stance on Thursday and signaled it’s ready to cut rates and buy more bonds to stimulate growth and lift inflation expectations.

On top of it, the U.S. economy grew 2.1% at an annual rate in the second quarter. Although it’s slower than the 3.1% growth in the first quarter, the number came in better than the 1.8% expected by economists.

As Barron’s had expected, drawdowns in business inventory and a reversion in the trade deficit subtracted about 1.5 percentage points of growth off the headline number.

Editor’s Choice

Net exports was providing strong support to the economy during the first quarter, but the re-escalation of trade tensions and ongoing uncertainty around tariffs have led to some choppiness in the trade sector, as businesses try to mitigate the impact of higher tariffs and supply chain disruptions.

But these factors tend to be more one-off and volatile—depending on the geopolitical headlines—rather than sustainable economic trends. Excluding them, the GDP actually grew 3.6% in the second quarter at an annual rate, compared with 1.9% in the first quarter. By this measure, the U.S. economy clocked in its best quarter of growth since the second quarter of 2018, when the stimulus from the 2017 tax cuts was at its peak.

“Even in the face of a variety of sources of uncertainty and broad indications that the economy slowed in recent months, the first look at Q2 growth holds more positives than negatives,” wrote Jim Baird of Plante Moran Financial Advisors in a Friday note. The general theme remains unchanged: While the industrial sectors are showing weakness, consumers remain resilient.

Consumer spending surged at a 4.3% annual rate, as spending on goods rose 8.3%–the fastest rate since the first quarter of 2006. Expenditure on durable goods, especially, grew by nearly 13% annualized. This strongly suggests that “despite some ominous signs on the economy, consumers remain surprisingly hardy, supported by constructive labor market conditions.” wrote Baird.

Write to Evie Liu at evie.liu@barrons.com