31 July - update from our investment partners

  • 31st July 2020

Technology saves the day after US economy dips

What has happened

Markets were downbeat yesterday as both Q2 US GDP and the initial jobless claims numbers painted a poor picture of the economic state of the US economy. Whilst sentiment recovered as the day moved on it took the US technology earnings, released after the closing bell, to change the tone.

US data meets low expectations

The US's sharpest quarterly downturn since 1947 (when quarterly data began) was recorded in Q2 of this year. The weakness was broadly expected and in fact the final number came in slightly better than the consensus. Quarterly GDP figures are one of those data sets that are annualised so the contraction in Q2 was 'annualised' at -32.9%. With dramatic quarters such as this we are not entirely sure annualising is sensible, whilst COVID-19 has certainly not gone away it is likely that future quarters will be far less dramatically impacted. As a result, it is probably fairer to focus on the quarterly change which was still a contraction of -9.5% over the three months. The second data set to dampen the mood was the initial jobless claims. Whilst, again, they were in line with expectations they rose for the second week in the row suggesting that the improvements in US employment conditions have tapered off.

Technology comes to the rescue

After the US closing bell, it was the job of Facebook, Apple, Amazon and Google (Alphabet) to restart the drumbeat of optimism. Facebook, Apple and Amazon all beat market expectations with their share prices each up over 5% in the aftermarket. Google saw its advertising revenues impacted by the pandemic so the results there were less exciting but were sufficiently in line with market expectations for the share price to be unmoved post the earnings release. The US Technology sector continues to show its resilience in the face of the pandemic disruption, and this helps support the heightened level of valuations. The current environment is goldilocks for tech with the low rate environment boosting growth equities whilst the COVID-19 pandemic speeds up the rate of adoption of technological solutions.

What does Brooks Macdonald think

The last 24 hours is likely to cement the US market leadership with technology continuing to show its ability to throw off the shackles of the virus and increase earnings. Despite the recent success of the EU recovery fund, the European data so far points to a far more uncertain outlook with the Euro Area GDP number (released this morning) missing expectations and showing a 12.1% quarterly decline.

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