Strong Q1 GDP Validates our Bullish Outlook

Q1 GDP validates our bullish view on the economy and stock market.  First quarter GDP was very strong lead by booming investment in technology which more than offset the ongoing recession in construction and housing caused by tight monetary policy.  Specifically, investment in equipment and intellectual property increased 17% and 13%, respectively, with construction contracting 6.7% and residential investment contracting at an 8% annual rate. Overall, investment contributed 1.5% to GDP growth out of the total 2.0% increase.  Personal consumption growth was tepid at 1.6% offset by a robust 4% increase in government spending.   The volatile net export component subtracted 1.3% overall from GDP which obscured the overall strength of the economy.

We forecast economic growth of 2.5% this year even if the Strait of Hormuz is not reopened and reiterate our S&P 500 Index target of 8,000. The strong growth is driven by robust tech investment and a resilient consumer as gasoline consumption is now only 3% of consumer spending versus up to 8% during the 1970s.

If the Strait is reopened in the first half of the year, we forecast GDP growth of 3.5% and would raise our S&P target to 8,600 based on surging 2027 EPS estimates and the likely decline in interest rates below 4%.