By Joyce Yu
Philadelphia, PA–Wall Street opened higher on Friday after Amazon announced a stellar set of first quarter results. But the gains were not sustainable as investors took profit and read into a softer economic report.
The US economy grew at a rate of 2.3% in the first quarter, according to the Commerce Department’s preliminary report on Friday. That’s slower than the 2.9% growth rate in the fourth quarter of 2017. This is still higher than the market forecast of a 2% growth rate.
Consumer spending, which accounts for more than two-thirds of the economy, grew only 1.1% last quarter, its weakest pace in nearly five years. This is compared with 4% growth in the last quarter contributed by anticipation of tax cuts and recovery in spending in hurricane-damaged areas.
“It’s kind of ironic that we’ve had a slowdown in consumption and investment just as the tax cuts are taking effect,” said Michael Pearce, a senior economist at Capital Economics. Pearce attributed the more modest spending to seasonal effects and a pullback after the holiday shopping season.
Economists expect acceleration in growth in the second quarter as the benefits of Trump’s income tax package start to kick in. Lower corporate and individual tax rates as well as increased government spending will likely lift annual economic growth to the administration’s 3% target.
Separately, highly expected Amazon didn’t disappoint the market with near-perfect quarter. Amazon.com Inc. shares jumped to a record high Friday, up as much as 7.9% with almost every major segment of the business contributing to the better-than-expected results.
“We are in the sweet spot between Amazon investment cycles where new fulfillment/data centers are driving accelerating revenue growth while incremental capacity utilization is driving margin expansion.” Goldman Sachs’s Heath Terry noted in his report, reiterating the buy rating and raising the target price to $2000 from $1,825.
Referring to the 25% increase in the price of a Prime membership which will yield about $2 billion per year in incremental revenue, J.P. Morgan believes consumers will renew the service even with its higher cost. “The last time AMZN raised the price of Prime was in March 2014, and we do not expect the company to get much pushback from consumers given the increasing value of the service,” analyst Doug Anmuth wrote in a note to clients Friday.
Another company who posted strong Q1 earnings is Intel which saw its shares jumped more than 4% higher Friday after beating both the top and bottom lines. However just like Amazon’s shares, Intel stocks also retreated after peaking at open as investors took profit.