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The second quarter U.S. GDP figures were released this week, with the widely used measure of economic growth falling by an annualized rate of 0.9%. This is the second consecutive quarter of decline in economic activity, with Q1 contracting at an annualized rate of 1.6%.

Traditionally, two consecutive quarters of economic growth would signal an official recession, however the current definition is a bit more complex. The National Bureau of Economic Research (NBER) is now tasked with determining when the economy has officially entered a recession, and so far they’ve held off from announcing it.

The NBER's job is to look at a wider spectrum of data to determine the overall health of the economy. One of the main factors in play right now is that the labor market is very strong. Job creation figures are high, overall incomes are increasing and consumer spending has remained stable.

A softening in economic growth is not necessarily a bad thing right now. Q4 2021 saw GDP growth hit 6.9% in the U.S., and this rapid rise has been a contributing factor to the record high levels of inflation being experienced right now.

The Fed is specifically targeting a slowdown in economic growth with their current interest rate policy, in an attempt to bring down these soaring prices. We may begin to see an impact of these measures in the inflation rate in coming months and all eyes will be on the figures for July when they’re announced on August 10th.

This week saw some major earnings announcements from some of the world’s largest and most closely followed companies.

Google’s GOOG parent company Alphabet missed revenue expectations ever so slightly, but they still managed to increase revenue by 13% compared to this time last year. Despite the miss, the news was well received by the market and the stock jumped 3% in after hours trading.

The increase in revenue has provided some comfort that Alphabet is managing to navigate a difficult economic environment, against a backdrop of significant volatility in the tech sector.

Microsoft didn’t fare quite as well, with a bigger earnings miss that saw their stock fall 1.2% in after hours trading. Revenue growth was still strong at 12% year on year and hitting $51.9 billion, however this was behind analysts estimates of $52.3 billion.

A key factor in the miss was the growth of the Azure and cloud services. Whilst still growing by an impressive 40%, it fell short of the 43.1% expectations.

Facebook parent company Meta also suffered a big miss in Q2, with revenue and earnings both below analysts estimates. More worrying was the miss on Monthly Active Users and Average Revenue Per User, with Mark Zuckerberg issuing surprisingly weak guidance for coming quarters.

It wasn’t all bad news though, with Apple and Amazon both beating analyst estimates for revenue growth. Apple also beat expectations on earnings, and Amazon’s figures were dragged down by their investment in electric carmaker Rivian, with the rest of core businesses performing well.

Overall the figures are encouraging for the sector given the level of pessimism dominating the market right now. There is still significant growth being achieved in traditional earnings centers, with revenue generators such as cloud services providing new avenues for company value.

Right now we’re in a period of low economic growth. In fact, as outlined above, it’s been negative for the past two quarters. This situation probably isn’t going to turn around quickly, and even if the figures go back into positive territory they’re not likely to be very high.

In an environment of low corporate earnings and low economic growth, smaller companies tend to be hit the hardest. Small Caps often underperform large caps in this kind of economy, because they generally have less of a track record and a less diversified revenue model than larger companies that have been around for a long time.

So, looking forward, whilst the market as a whole could continue to experience volatility, there’s an opportunity to still make money based on this relationship between Small Caps and Large Caps. We created the Large Cap Kit to make a bet on the valuation divergence between these two sectors of the market, rather than betting on the market direction as a whole.

It means that regardless of whether the broader market is up, down or flat, investors can make money if Large Caps outperform Small Caps.

The mechanisms behind this trade are fairly complicated, but in a nutshell we hold a long position in Large Caps and a short position in Small Caps. We use our AI to rebalance this trade weekly to hold the optimal balance of the long and short position.

Here are some of the best ideas our AI systems are recommending for the next week and month.

Shoe Carnival (SCVL) – The footwear retailer is one of our Top Buys for next week with an A rating in Quality Value and Technicals and a B in Growth and Low Momentum Volatility. Revenue was up 14% year on year to the end of April.

Evofem Biosciences (EVFM) – Women’s healthy company Evofem Biosciences is a Top Short for next week with our AI rating them an F in our Low Momentum Volatility factor, as well as an F in Technicals. The company's earnings per share have plummeted 28.46% over the past 12 months.

Enlink Midstream (ENLC) – The natural gas producer is a Top Buy for next month with an A in Quality Value and a B in our Low Momentum Volatility and Growth factors. Analysts are projecting revenue growth of 20.03% in 2022.

Calithera Biosciences Inc (CALA) – The biopharmaceutical business remains our Top Short for next month and our AI rates it as an F in Quality Value and a D in Low Momentum Volatility. Earnings per share were -$28.78 in the 12 months to March 31st 2022.

Our AI’s Top ETF trade for the next month is to invest in oil & gas, mining and the Brazilian market, while shorting fixed interest. Top Buys are the SPDR S&P Oil & Gas Equipment & Services ETF, iShares MSC SC I Brazil ETF and the VanEck Gold Miners ETF. Top Shorts are the iShares 1-3 Year Treasury Bond ETF and the Vanguard Short-Term Bond ETF.

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