Q2 2026 GDP

Late last week, the US Bureau of Economic Analysis issued an advance reading of US Gross Domestic Product for Q2 2026. GDP rose 1.5% in the quarter, down from 2.1% in Q1 (which had also been the Q2 forecasted amount). As you may recall from prior writings, the formula for GDP is:

C (Consumption): Total consumer spending by households on goods and services.
I (Investment): Business spending on capital equipment, housing, and inventory changes.
G (Government): Public expenditures on infrastructure, defense, and employee salaries.
(X – M) (Net Exports): Total exports (X) minus total imports

As a result, even though the AI cap ex boom is pushing GDP higher, the fact that a considerable amount of goods are imported for those build-out efforts dampens net GDP.

Upon release of this number, there were headlines commenting that inflation is hampering domestic growth (arguing that uncertainty from the war and ongoing price levels have caused consumers to become more cautious). However, a look into the numbers did not show a slow down in consumption or investment – with those metrics contributing 3.9% in the quarter (up from 1.7% in Q1). Overall, growth remains in decent shape but has trended down from Q1 on a total basis.

Q2 2026 Earnings

Once again, it appears as if earnings are getting markets past a down period. Despite early volatility in July (namely in momentum/AI names), the earnings for the quarter have been exceptional. These outcomes, plus some favorable geopolitical news reports, pushed US equity markets to all time highs this week.

Here are some figures to show the earnings strength – 64% of S&P has reported thus far as of Tuesday morning. 88% are beating estimates (by median of 6%) and for those that have reported, earnings growth has been 57%. US companies continue to prove their resilience – in the face of most challenges thrown their way

Fed Speaking Less

Market commentators have spent a lot of time this week discussing the change in practice by Fed Chair Kevin Warsh, where he and the Fed Governors will not be providing frequent communications/comments regarding rates in between rate decision meetings. This will take markets some getting used to but may end up being a good thing (less confusion/whipsaw in thinking? we shall see).

However, despite this new stance, markets have continued to debate the Fed’s likely future path. Inflation reports are due for July and probabilities of rate hikes in 2026 and 2027 remain higher than seems possible. I read an interesting report this week that countered the belief the Fed will raise rates. It may two good arguments:

1. Many believe AI spending/build-out is causing inflation. However, if you look at the earnings reports of the hyperscalers that are paying for this buildout, the numbers are hard to comprehend and the vast majority of that spending is being paid for from current earnings. How likely is it that the Fed raising 25 – or even 100 basis points – will slow the spending? Not very likely
2. Inflation is still above the Fed’s 2% target. However, if you look at the top contributors to inflation, again, it seems unlikely that higher rates will do much of anything to curb that spending. The top 4 are: airline tickets, shelter, apparel, and recreation. Much has been made of the bifurcation in the economy and the spending coming from the highest earners/those with invested capital. If they are not rate sensitive, what good will a hike do? Again, likely not much.

Markets continue to provide something for everyone and truly bring to life the saying “never a dull moment.” Hopefully you are enjoying the waning months of summer but be sure to stay tuned to markets as well – makes for exciting viewing!

Onward we go,