‘G force’ driving world markets may need Fed and bond brake: Mike Dolan
SPY•A boom in AI infrastructure spending is helping sustain hot growth and earnings, while inflation and rising Treasury yields may leave the Federal Reserve facing further rate hikes. S&P 500 companies’ earnings grew more than 50% annually in the second quarter and are expected to rise more than 30% in the third.
1. Growth and earnings surge
AI infrastructure investment is helping drive strong growth and earnings, with about a third of GDP growth estimated to come from the AI spending surge. Nominal U.S. GDP growth was likely above 8% in the second quarter and is on track to top 9% in the third, while the Atlanta Fed’s GDPNow model tracks real third-quarter growth at 5.1%.
2. Inflation and rate pressure
The Cleveland Fed’s inflation Nowcaster sees headline personal consumption expenditures inflation reaching 4% this month. The article says the Fed is expected to deliver as many as four more rate hikes over the coming year, following one several weeks ago; Treasury securities with maturities from three to 30 years now yield more than 5%.
3. Yields meet resilient markets
S&P 500 companies’ annual profit growth topped 50% in the second quarter and is expected to exceed 30% in the third quarter and reach about 28% in the fourth. AXA Group Chief Economist Gilles Moec said financial conditions remain accommodative relative to average levels, while strategist Andrew Sheets said markets are weighing how long strong growth can continue to support asset prices.
