US Economy Risks Overheating Amid AI-Fueled Growth

The US economy is experiencing an unusual period of growth, fueled by government largesse, low interest rates, and booming business investment.

Profits for S&P 500 firms have accelerated to nearly 50% through the latest quarter, with annualized GDP growth reaching almost 8% in the second quarter. Consumer spending surged 3.2%, while business investment in equipment increased at a 15% pace.

The AI frenzy is driving more than $1 trillion in capex from hyperscalers building infrastructure this year alone, contributing to the strong profit growth. Revenue growth is running at a more modest 14%, with margins reaching new highs.

Stephen Jen and Fatih Yilmaz at Eurizon SLJ posit that consumers are less price-sensitive than in the past due to the scale of fiscal spending still in the system, which shows no sign of being reversed. They argue for a 'fiscal stimulus-price spiral' rather than the traditional 'wage-price spiral.'

The Federal Reserve could take action to cool equity values and spending through interest rate hikes, but bond markets are currently signaling caution with rising yields.