The US Department of Commerce – Bureau of Economic Analysis (BEA) released its GDP preliminary figures for the first calendar quarter. Real (after inflation) gross domestic product (GDP) increased at an annual rate of 2.0 percent compared to the prior quarter.
Personal consumption increased at an annual rate of 1.6%, while gross private domestic investment increased at a rate of 8.7%. Nonresidential structures and residential structures both declined at rates of -6.7% and -8.0%, respectively. Nonresidential equipment and intellectual property products increased at rates of 17.2% and 13.05%, respectively. Government consumption and investment increased at an annual rate of 4.4%. Imports grew at a faster rate of 21.4%, compared to exports, which increased at a rate of 12.9%.
The BEA breaks down how much each GDP component contributes to total GDP growth. Personal consumption expenditures contributed 1.08% to the 2.0% increase in GDP for the quarter. Gross private domestic investment contributed 1.48% to GDP. Net imports had a negative impact of -1.30% on GDP growth.
Some economic analysts are concerned that most of the GDP growth was due to investment related to the artificial intelligence (AI) buildout and returns on investment for many of the AI initiatives remain uncertain.
Personal consumption is unlikely to be a major source of economic growth in the near future as it has grown at a faster rate than personal income during the past year. The personal savings rate has declined to 3.6% as of March 2026, which is the lowest rate since November 2022.
Federal government spending may increase substantially for the next fiscal year beginning October 1. The White House budget request includes $1.5 trillion for defense spending, a 42% increase from the current level of $1.05 trillion. The Congressional Budget Office is projecting that the budget deficit for the current fiscal year ending September 30 will be $1.9 trillion with total expenditures of $7.4 trillion. The budget request is currently under review by Congress and analysts expect an “uphill battle” for approval, even with the current Republican majorities in both chambers.
According to www.multpl.com, the S&P 500 index remains at a high valuation level with a P/E ratio of 31.0 based on reported earnings for the last twelve months. The Shiller P/E ratio which is cyclically adjusted for the past ten years is higher at 40.9.
FINRA margin debt also reflects a high level of speculative interest, at $1.22 trillion as of March 31, more than double the $607 billion for December 2022.
Research Affiliates is currently showing a projected nominal annualized return for the next ten years of 3.5% for US large cap stocks. Research Affiliates avoids prognostications on the US economy or geopolitics. Their expected returns simply reflect a steady state economy and a return to more normal valuation levels.
While expectations are low for the S&P 500 index, there are some stocks that sell at reasonable valuations with good fundamentals. Companies that we own include Verizon, SM Energy, Paypal, Allstate, Danaos, and Global Ship Lease – all of which continue to report revenue growth and sell at P/E ratios in the single digits. The exchange-traded funds that we own also have a similar value orientation.
If you have any questions or comments, please contact me.
Robert G. Kahl
CFA, CPA, MBA