Underlying drivers of consumption and business spending have turned up
There are signs that both personal spending and business investment may be set to pick up speed, developments that could bolster corporate earnings.
The primary driver of consumer spending is real, or inflation adjusted, income growth. With employment increasing and wage growth starting to accelerate, income is now growing over 3.3% in real terms, as you can see in the chart. If inflation remains muted, real income growth could accelerate further, which could provide the impetus for stronger consumer spending growth.
Historically, business investment has been driven by a combination of profit growth and rising capacity utilization, the rate at which the economy is using its full production capacity.
After spiking and significantly dropping off at the start of the recent recovery, the combined growth rate of company profits and capacity utilization has begun to turn up, suggesting businesses may soon boost investment in equipment and software.
Areas of the market where earnings growth could drive multiple expansion and bolster stock prices over the long term include consumer discretionary companies and the pharmaceutical and biotechnology fields. Netflix, a leading subscription video-on-demand service, has seen its subscriber base rise in recent quarters. Biotechnology companies like Gilead Sciences have invested heavily in research and development, leading to new therapies and expanded product pipelines.
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