Ask yourself: Is the U.S. economy accelerating or decelerating? We say it's accelerating. Just look at recent data on durable goods, capital expenditures and corporate profits. Here are the key charts and some brief analysis from today's Early Look written by Hedgeye CEO Keith McCullough:
1. Household Demand
Durable Goods Ex-Defense & Aircraft accelerated from +3.7% year-over-year in April to +5.3% in May. That's a 33-month high. We look at Durable Goods “Ex-Defense & Aircraft” because it’s an indicator for US Household Spending (i.e. Consumption is 70% of US GDP).
2. Capital Expenditures
Capital Goods (Capex) accelerated from +3.1% year-over-year growth in April to +5.0% in May. That's a 33-month high too. The US Capex recession bottomed as the US stock market did in January-February 2016 at -6.2% year-over-year and remained in recession until November 2016 before rebounding.
3. Corporate Profits
Corporate Profits ramped to +9.3% year-over-year. Recall this trend of profits accelerating comes after five consecutive quarters of negative year-over-year profit growth.
So what do you do with all this information?
We say get long the U.S. economy, especially stocks most tethered to American consumers like the Technology sector (XLK). Our look at historical data over the last 20 years shows that Consumer Discretionary (XLY) and Tech stocks have positive expected values of +4.4% and +4.0%, respectively, and are the top performing equity sectors when U.S. growth is heating up at the same time inflation growth is slowing.
It boils down to this: The "Tech Rally is Not Over!"