America's Baked?

It's a stretch of a title - but the idea, or question rather, is "what's baked in the cake?" What's priced into the markets? As stated previously, the profitability of companies is strong and being proven during this earnings season. The real focus however is on revenue and future growth.

After 3 quarters of inventory restocking by businesses, a jump in housing prices, a Q1 pop in consumer spending and stimulus spending, the US economy and stock markets found fresh ground and positive economic data for a rally.

However, all of those factors are now nearly gone. Inventory restocking is near complete. Housing is double dipping after the expiration of the home buyer tax credit. Consumers have found religion and returned to a savings rate of 4%. And stimulus spending is largely run out (and it doesn't appear that a gridlocked Congress may be adding many new stimulative programs soon).

So, what does the 2nd half of 2010 look like? Most everyone acknowledges a slowdown is coming. Not a double dip, but a slowdown as the above affects are gone. However, the question is how much of a slowdown are the markets expecting/priced for? 2nd half projections were hard to find, so for now take a look at the general expectations for 2nd quarter growth (the last quarter where the above factors were still somewhat impactful mind you).

JPM expects 2.2%.
Nouriel Roubini = 2.1
Morgan Stanley = 3.8
Fed Reserve (member)= between 2.5 and 3
Bank of America/Merrill = between 3 and 3.3
GS = 3

Personally, I usually find myself lining up with Nouriel Roubini's outlook on economic forecasts and policies. But consider that JPM is right there as well.

Nouriel expects 3Q growth of 1.6% and 4Q of 1.5%. Even GS forecasts GDP of around 1.7-2% for the 2nd half of 2010. If these prove true, you have to ask whether the market is already priced properly or not.

The initial estimate of 2Q GDP is released Friday, July 30th. Mind you, that estimate is then revised a month later, and then revised a final time one month after that. For ex: 1Q GDP started with a 3.2 estimate and was subsequently revised down to 2.7 by the end of June -- so take even the July 30th estimate with a grain of salt.