US focus: Q1 GDP and earnings test market resilience

Now that President Trump’s first 100 days are behind us, the markets are looking at what the future holds for the rest of the President’s term in office. The impact of the President’s unorthodox economic policies on Q1 activity will be unveiled on Wednesday with Q1 GDP scheduled for release and key earnings reports.

How bad will it be?  

This is the question that everyone is asking ahead of the Q1 GDP report that will be released at 1330 BST on Wednesday. Analysts are now looking for a decline of 0.1% on an annualized QoQ basis. This is a sharp decline from the 2.4%  growth rate recorded in Q4 2024. Some expect an even sharper decline. The Atlanta Fed GDPNow model is predicting a 2.4% decline, while Bloomberg’s economist estimates span a wide range. The highest estimate is for growth is 1.7%, the lowest estimate is -2.4%.

Trade set to be the biggest drag on GDP

The economy is likely to be hit hard by Donald Trump’s unorthodox economic policies that have caused disruption to activity.  One of the biggest drags to Q1 GDP is likely to be trade. The trade deficit widened to a record in March, as businesses rushed to import goods from China and elsewhere ahead of the implementation of reciprocal tariffs in April. Some analysts believe that this could knock 3% off GDP for last quarter.

Consumer spending is also expected to slow sharply. In Q4, consumption growth was an extremely strong 4%, this is expected to slow to 1.1%, which suggests that the US economy cannot rely on the consumer to do the heavy lifting when it comes to growth.

Recession risk warning

The risk is that growth remains weak for Q1, even though businesses and some consumers may have pulled forward consumption to avoid the effect of tariffs. Thus, the outlook for consumption could be worst for Q2, and the impact of tariffs could impact growth for some time.

Interestingly, even with the government efficiencies from Elon Musk’s DOGE unit, government spending is likely to have added to growth last quarter, largely because of projects and spending that was committed by the Biden administration. We expect the DOGE cuts to have a bigger impact in Q2 and beyond.

Part of the market’s bleak view for Q1 GDP is driven by weakness in the stock market, which has knocked confidence. The question now, have we reached a bottom for stock markets and for US consumer and business confidence? If growth manages to remain positive then this could boost US stock markets and encourage the ongoing recovery in market sentiment. However, a sharp decline could knock confidence, especially since there could be worse to come.

The Dollar in focus

The dollar will also be in focus. Usually, a currency rallies when the economic backdrop is bright. A sharp slowdown in Q1 GDP could focus minds on the challenges facing the US economy and interrupt the dollar’s recovery rally so far this week. The US dollar is the best performing currency in the G10 FX space so far this week, however, confirmation of a bad quarter for the US economy could knock this. EUR/USD remains in an uptrend, even though it has backed away from the highs above $1.1550. It is hard to see how the USD can sustain a recovery rally if the growth outlook remains dim. Overall, this earnings report could once again raise concerns that the US economy is heading for a recession, which is bad news for the dollar and for US stocks.

Big tech earnings to test demand for Magnificent 7

After the US markets close on Wednesday, Meta and Microsoft are scheduled to report results. Compared to Google, which surpassed expectations and posted strong results for the last quarter, Meta and Microsoft are both expected to report weaker results compared to recent quarters. Economic uncertainty is likely to weigh heavily on Meta’s advertising revenue for last quarter, while Microsoft’s cloud unit sales could disappoint.

Revenue growth at Microsoft is expected to slow to a 10.8% pace for last quarter, down from 12.3% in Q4. Analysts expect Meta to report revenue of $41.37bn, down from $48.38bn in Q4, as advertising revenue withers. Weak economic confidence could also be reflected in the performance of Microsoft’s cloud unit, as business capex spending and investment is cut back due to the uncertain outlook for global growth. If this is confirmed, then it may add to fears about the speed of monetization of AI technology for the likes of Amazon, Microsoft etc.,  and weigh on the recovery of US tech stocks.

The Magnificent 7 index of the biggest US tech firms, fell nearly 30% from its peak in December to its trough earlier in April. US tech has attempted to make a comeback alongside the broader markets in recent weeks, but the Magnificent 7 as a whole is still down more than 17% from the December high. Although big tech has been a drag on the overall market this year, in recent days, US stocks including the Magnificent 7 have kept pace with US stocks excluding the Magnificent 7, as the likes of Nvidia have risen more than 4% in the past week.

Earnings reports and recession risks are chunky issues for investors to deal with. Market sentiment is quick to change direction in the current climate, so expect Wednesday’s key economic and corporate releases to have a big impact on markets.