The U.S. Economy Is Overheating Under a Heavy Fiscal Stimulus

Nominal GDP growth hit an annualized rate of nearly 8% in the second quarter, a figure almost double the 25-year average. This expansion is powered by a 3.2% surge in consumer spending and a 15% jump in business equipment investment. Fueling this momentum, S&P 500 firms are reporting annual profit growth of 47%, far exceeding initial estimates. Analysts at Barclays note that margin expansion, particularly in the technology and energy sectors, has become the primary engine behind these record-breaking earnings.

Stephen Jen and Fatih Yilmaz of Eurizon SLJ suggest the economy is currently trapped in a fiscal stimulus-price spiral. With federal budget deficits exceeding $2 trillion annually and AI-related capital expenditure topping $1 trillion, aggregate demand remains stubbornly high. This environment grants corporations immense pricing power, as consumers—particularly the top 25% of earners—remain largely indifferent to persistent inflation.

Rising bond yields serve as the primary warning signal in an otherwise exuberant market. If the Federal Reserve chooses to remain on the sidelines, the bond market may eventually force a correction. Two interest-rate hikes before the end of the year could temper equity valuations and margin growth, though such moves remain a point of contention among those betting on the current cycle's longevity.