EARNINGS WATCH

Corporate America’s Profits Are Booming—and Signal More Good Times Ahead

Profits are booming at America’s biggest companies—and their leaders say that likely won’t change soon. (…)

S&P 500 earnings rose the most since fall 2021. Quarterly sales also climbed more than they have in years. By a nearly 2-to-1 margin, more companies raised their profit guidance for the current quarter than lowered it—a turnaround from a year ago, when more were lowering their outlooks. (…)

So far, there are few signs that the factors driving growth will wane in the near future, said Torsten Slok, chief economist of Apollo Global Management.

“As long as the AI boom continues and the stock market continues to be elevated, and we continue to have strong consumer income growth, the consumer will continue to be in good shape,” he said. But if the promise of AI fails to justify the massive investment, “we will be having a different conversation.”

The FT:

Pre-tax earnings hit an annualised $4.8tn in the second quarter, or 18% of national income, according to Bureau of Economic Analysis data, the highest share since the aftermath of the second world war.

Employees’ share from wages and benefits fell to 60%, the lowest level since the 1950s. “Regardless of what measure you look at, workers, in terms of employee compensation, have been receiving an increasingly small share of national income over time,” said Abiel Reinhart, an economist at JPMorgan.

The decline in labour’s share of income has gained pace in the past five years and especially over the past 12 months.

From LSEG IBES:

483 companies in the S&P 500 Index have reported earnings for Q2 2026. Of these companies, 85.7% reported earnings above analyst expectations and 11.2% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 80% of companies beat the estimates and 16% missed estimates.

In aggregate, companies are reporting earnings that are 8.5% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.4% and the average surprise factor over the prior four quarters of 7.5%.

Of these companies, 77.3% reported revenue above analyst expectations and 22.7% reported revenue below analyst expectations. In a typical quarter (since 2002), 63% of companies beat estimates and 37% miss estimates. Over the past four quarters, 73% of companies beat the estimates and 27% missed estimates.

In aggregate, companies are reporting revenues that are 3.6% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 2.2%.

The estimated earnings growth rate for the S&P 500 for 26Q2 is 53%. If the energy sector is excluded, the growth rate declines to 49.2%.

The estimated revenue growth rate for the S&P 500 for 26Q2 is 15.6%. If the energy sector is excluded, the growth rate declines to 13.5%.

The estimated earnings growth rate for the S&P 500 for 26Q3 is 29.4%. If the energy sector is excluded, the growth rate declines to 26.1%.

 

Shame on S&P Global which would not care to normalize earnings for non-operating investment gains.

Factset does it (my emphasis):

With NVIDIA reporting actual results for Q2 on August 26, all the companies in the “Magnificent 7” have now reported earnings for the second quarter. (…)

On June 30, the estimated earnings growth rate for the “Magnificent 7” companies for Q2 was 30.8%. (…) In aggregate, earnings reported by the “Magnificent 7” companies exceeded estimates by 66.2%, compared to 26.5% for all S&P 500 companies.

As a result, the “Magnificent 7” companies reported actual earnings growth of 118.5% for the second quarter, which is the highest earnings growth rate reported by these seven companies going back to at least Q4 2020 (when Tesla joined the S&P 500).

On the other hand, the blended earnings growth rate for the other 493 S&P 500 companies for Q2 is 31.8%, which is the highest earnings growth rate reported by this group of companies since Q4 2021 (32.4%).

The top five contributors to earnings growth for the S&P 500 for Q2 2026 are (in order) Alphabet, Amazon.com, Micron Technology, NVIDIA, and Chevron. Thus, three of the top five contributors are “Magnificent 7” companies.

However, it should be noted that EPS reported on a GAAP basis by Alphabet and Amazon.com was used for both the earnings surprise and the earnings growth rate calculations, as the majority of analysts contributing EPS estimates to FactSet for these two companies are providing EPS estimates on a GAAP basis. Alphabet and Amazon.com historically have only reported EPS numbers on a GAAP basis.

Both Alphabet and Amazon.com reported substantial increases in other income for the second quarter due to investment gains, which were included in their (GAAP) EPS numbers.

The (GAAP) EPS actual for Alphabet for Q2 included a gain of $98 billion in other income primarily due to net unrealized gains on equity securities, while the (GAAP) EPS actual for Amazon.com for Q2 included a gain of $53.4 billion in other income primarily due to investments in Anthropic.

Excluding Alphabet and Amazon.com, the earnings growth rate for the “Magnificent 7” companies falls to 43.2% from 118.5% and the earnings surprise percentage for the “Magnificent 7” companies for Q2 falls to 4.4% from 66.2%.

While all publicly traded U.S. companies report EPS on a GAAP (generally accepted accounting principles) basis, many U.S. companies also choose to report EPS on a non-GAAP basis. There are mixed opinions in the market about the use of non-GAAP EPS. Supporters of the practice argue that it provides the market with a more accurate picture of earnings from the day-to-day operations of companies, as items that companies deem to be one-time events or nonoperating in nature are typically excluded from the non-GAAP EPS numbers.

Critics of the practice argue that there is no industry-standard definition of non-GAAP EPS, and companies can take advantage of the lack of standards to exclude items that (more often than not) have a negative impact on earnings to boost non-GAAP EPS.

On the other hand, EPS reported on a non-GAAP basis by NVIDIA, Micron Technology, and Chevron was used for both the earnings surprise and the earnings growth rate calculations, as the majority of analysts contributing EPS estimates to FactSet for these three companies are providing EPS estimates on a non-GAAP basis.

Chevron ($6.06 vs. $6.11) and NVIDIA ($2.22 vs. $2.46) reported lower non-GAAP EPS than GAAP EPS, while Micron Technology ($25.11 vs. $24.67) reported higher non-GAAP EPS than GAAP EPS. The non-GAAP EPS reported by NVIDIA for Q2 excluded investment gains.

Looking ahead, analysts expect the other 493 S&P 500 companies to report higher earnings growth than the “Magnificent 7” companies in Q4 2026 (26.8% vs. 23.2%).

There should not be any debate. Investors need to know what recurring, operating earnings and margins are.

Factset adds:

Alphabet’s paper revaluation alone accounted for roughly 10% of the entire S&P 500’s quarterly net income, while Amazon’s accounted for another 5%. In total, these non-operating tech markups were responsible for driving nearly 40% of the entire index’s massive “earnings surprise“.

There was more than GOOG and AMZN:

• GOOG: $98.0B
• AMZN: $53.4B
• MSFT: $3.2B
• TSLA: $1.0B
• EchoStar: $9.7B
• NIKE: $0.52/sh on $0.72/sh total.

Add the tariff refunds companies are now recording. My AI lists 12 companies having recently recorded tariff refunds totaling $11.1B.

So beware of trailing EPS until this MtM episode fades. Look at cashflows instead or forward EPS which should not include any expected gains but necessitate forecasts.

On margins:

Dealroom:

The S&P 500’s aggregate net profit margin vaulted to a record-high 16.9%. This severely overstates standard corporate profitability, far exceeding the index’s historical 5-year average of 12.4%. Excluding these top tech giants drops the normalized index margin to roughly 15.0%. While 15% is still historically robust, it reflects a far more grounded operational environment than the headline 16.9% suggests.

  But there is much more to earnings and margins:

As we all know, hyperscalers are spending humongously on data centers, more than $800B this year alone and likely over $1T next year.

Their capex spending is somebody else’s revenues. Think chip makers but also contractors, suppliers of infrastructure and energy/electrical equipment, etc.. It hits broadly among Industrials (Q2 revenue growth: 11.9%), Materials (9.6%), Energy (42.2%), Technology (36.8%), Comm. Services (12.6%) and Utilities (5.3%). Total S&P 500 revenues were up 15.6% in Q2; the US GDP deflator was up 4.4%.

The different accounting treatment of the revenues/profits and the capex investment creates a timing mismatch that temporarily boosts profit margins because of the current unusually large numbers involved.

Capex recipients recognize revenues and earnings immediately while the capex spenders capitalize the cash outlays and amortize (depreciate) them over several years.

This timing difference is normally not meaningful but this huge capex frenzy is truly unprecedented.

Many large and small suppliers see a revenue/profit windfall from a few humongous capex spenders which only record costs as the assets are gradually depreciated.

So the S&P 500’s 16.9% profit margin is not only artificially inflated by huge mark-to-market (non-operating, non-recurring) gains, the normalized 15.0% margin is also inflated by the mismatch in the accounting treatment of those capex.

Eventually, this mismatch will also normalize and even reverse when capex will slow but depreciation expenses will endure.

Analysts and investors have a habit of extrapolating recent trends. Beware of this one, most, if not all, of it is artificial and unsustainable.

Total US corporate profit margins were boosted by lower tax rates and the pandemic. They are now boosted by AI:

Kevin Warsh: the Hawk at Jackson Hole How much clearer can the Fed Chairman be about taming inflation?

Now will Wall Street and the scolds in the financial press believe Kevin Warsh? The new Chairman of the Federal Reserve on Friday delivered his firmest statement to date of his determination to tame inflation, and the clearest explanation of how he thinks the Fed should get there. (…)

Mr. Warsh’s speech Friday at the Kansas City Fed’s annual confab at Jackson Hole, Wyo., should put all that to rest.

His central point was that the Fed isn’t done fighting inflation and won’t be until its traditional measure of price rises has slowed back to 2%. He conspicuously played down signs of disinflation in recent months by noting evidence that prices for too many goods continue to rise too quickly.

Mr. Warsh’s assertion that he’d be “hard pressed to describe broad financial conditions as restrictive” is a notable contrast with his predecessor, Jerome Powell, who believed the Fed already had tightened enough to tame inflation sooner or later. None of this is specific forward guidance, yet it’s a firmer message on inflation than markets have heard from the central bank in some time. (…)

AI’s effect on the economy and monetary policy will depend on a wide range of unknowns concerning which sorts of firm prove most profitable, how AI affects employment, and other factors. (…)

His speech should put another canard to rest. Among the task forces Mr. Warsh has created to advance reform at the Fed, the panels on data sources and inflation dynamics have given rise to a view that he’s looking for excuses to be more dovish. Wall Street worked itself into a lather over the idea that the Fed could adopt a more forgiving inflation measure than the personal-consumption-expenditure index the central bank tracks.

Instead, on Friday Mr. Warsh rejected the assumption embedded in the Fed’s current economic models that inflation naturally reverts to its 2% level over the longer term. This puts the Fed back on the hook for every tenth of a percentage point of its inflation mandate. His emphasis on real-time data seems intended to avoid the backward-looking false dawn that led the Powell Fed to cut rates prematurely in two rounds in 2024 and 2025.

While the usual Keynesian suspects will claim it’s old-fashioned, Mr. Warsh’s assertion that “money has something to do with monetary policy” is another way of holding the Fed accountable.

He acknowledges financial technology has changed the definition of the money supply and money’s velocity. But Mr. Warsh seems to be saying the Fed shouldn’t be blind to early warnings, such as asset-price run-ups, that its policies are too loose. If only his predecessors had thought the same. (…)

• Markets Brace for Possible Rate Hike After Kevin Warsh’s Hawkish Turn

(…) Warsh’s suggestion that the Fed might have more “work to do” to fight inflation suddenly put a September interest-rate increase in play. Interest-rate futures showed traders now see a roughly 58% chance that the Fed will raise rates at its next meeting, up from 35% on Thursday, according to CME Group data. (…)

The start of September kicks off what has historically been a bumpy month for the stock market. Warsh’s speech left his options open and traders still relatively unsure where monetary policymakers will land at their next meeting on Sept. 16, said Kristian Kerr, head of macro strategy for LPL Financial. (…)

FYI:

• S&P 500 DRAWDOWN AFTER AUGUST IN EVERY RECENT MIDTERM ELECTION YEAR:

@zeroXhope

Goldman Sachs’ economist Pierfrancesco Mei just published a timely analysis that all FOMC members should read:

Looking for Pockets of Overheating

(…) some Fed officials have highlighted resource constraints connected to the AI boom as a source of inflationary pressure, which raises the broader question of whether there are pockets of overheating beneath the surface. We use industry-level data, including alternative data measures of utilization rates in the services sector, to assess the extent of capacity constraints.

• We find few pockets of overheating in the labor market. Across most industries, the jobs-workers gap has fallen below its pre-pandemic level, and in the few industries where it remains somewhat elevated, such as wholesale trade and healthcare, it has eased significantly from its pandemic peak. Nor do we find signs of regional labor shortages (…). Consistent with this, the breadth of elevated wage growth remains moderate: about 35% of industries are seeing nominal wage growth above 4%—the pace we estimate is consistent with 2% inflation—somewhat above the 25% average over 1990-2019 but well below the 90% peak in 2022.

• We also see only limited evidence of capacity constraints binding in the manufacturing sector. Most manufacturing industries operate well below their maximum potential output, and only a few are nearing their peak rates of capacity utilization reached in recent business cycles—notably, electrical equipment and machinery manufacturers, likely reflecting AI-related demand. Overtime hours worked, which tend to lead pickups in capacity utilization, also remain well below their sector-specific peaks.

• (…) most [services] industries remain well below their peak utilization rates of the past two decades, with the exception of professional services—where certain consulting activities are likely supporting the AI transition. We also find that our combined services capacity utilization index helps to forecast services inflation, but at the moment it is running only slightly above its long-run average and implies only modest additional inflationary pressure in the services sector.

• We combine our labor market, manufacturing sector, and service sector measures of capacity constraints into a composite bottlenecks indicator that tracks the share of industries where the jobs-workers gap, wage growth, or capacity constraints are particularly elevated. Our bottlenecks tracker has ticked up slightly in recent months—largely reflecting a widening of the jobs-workers gap in a few sub-sectors whose labor markets firmed after the weakness in 2025—but remains in line with its pre-pandemic level. This suggests that pressures are not unusually broad-based and that pockets of overheating remain limited so far.

K-shaped capex:

If GS is right, PPI inflation should shortly retreat back down instead of pulling overall inflation up:

Here’s the core version:

Productivity?

• Headline CPI is +3.8% YoY while Unit Labor Costs are up 1.4%. Correlation: 53%.

• Headline CPI is +3.8% YoY while Labor Productivity (output per hour) are up 2.2%. Correlation: –39%.

Kevin Warsh last week:

We recognize that AI is a new variable—potentially a new factor of production—that will have consequences for both the economy and the conduct of monetary policy. It opens some major lines of inquiry:

Will the application of AI cause a significant, sustained rise in productivity across the economy? And if so, when?

Some companies, notably WMT and AMZN, said that they will use tariff refunds to lower prices.

But some nasty inflationary pressures remain:

• Hormuz/Red Sea: impact on costs and availability.
• Russia/Ukraine.
• Demand from defense spending worldwide.
• Demand from green energy spending.
• AI demand.
• Supply chains deglobalization.

All urgent demands that are price/costs insensitive

Good luck with that call.

Did Kevin Warsh help us on that last week?

• Certain sectors—like housing and agriculture—are showing strains. But, on balance, I would be hard pressed to describe broad financial conditions as restrictive.
• Combining consumption with the brisk investment we’ve observed, private domestic final purchases (PDFP) has also risen. PDFP has increased at a pace of nearly 3 percent so far this calendar year. That’s a measure that typically carries more signal than gross domestic product, and the trend here too is positive.
• But on the price-stability side of our mandate, the numbers are more concerning. The Fed’s preferred measure of inflation, the 12-month change in the PCE price index, stands at 3.7 percent, while the six-month change is 4.1 percent. The comparable measures from the consumer price index (CPI) are also elevated, as are the core measures of both PCE and CPI inflation. None of these measures are perfect, but they all tell a similar story: Inflation is running above our 2 percent target. So the Fed’s predominant focus right now should be on prices.
• The job for policymakers is to capture underlying trend inflation—that is, the generalized change in prices in the economy, unaffected by idiosyncratic factors. (…) And while this summer’s PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved.
• The data also show moderate wage growth. But in tracking underlying inflation, wage growth has not proven a reliable indicator of future inflation for a very long time.
• Over the past 12 months, 54 percent of goods and services in the PCE basket showed price increases above 3 percent. (…) it remains well above the level of 32 percent in the two decades that preceded the pandemic. Looking over just the past six months, the conclusion is similar: Of goods and services in the PCE basket, 49 percent showed annualized price increases above 3 percent. (…) still quite elevated.
• The recent rise in overall commodity prices also bears watching. What we need to judge is whether trends indicate upside inflation risks.
• The thing about market measures of inflation expectations in economic history is that they tend to look strong and durable until they don’t. Those expectations are not pushed around easily, and right now they are well anchored. But they must be closely minded. It’s the Fed’s job to make sure that inflation expectations do not get unanchored.

On one hand, on the other hand. Some things never change.

But markets read him hawkish.

The Strongest El Niño in a Generation Is Wreaking Havoc on Global Economy The weather phenomenon is already roiling industries, from shipping to copper to fish feed

(…) Scientists monitoring data from satellites and ocean buoys declared the onset of El Niño in June. It is shaping up to be among the strongest in living memory. Ocean temperatures are the highest on record, with this belch of Pacific heat adding to the warming driven by greenhouse-gas emissions. (…)

Callahan’s research suggests that El Niño events can cause trillions of dollars in lost income, particularly in tropical economies. They will become more challenging as the climate warms, scientists say, adding heat to a planet where some extreme-weather events are already intensifying. El Niño is expected to persist into 2027, which is widely forecast to be the hottest year on record.

Among those bracing for impact are shipping companies using the Panama Canal. El Niño is turning the waterway into another chokepoint in a global economy riddled with them, from the Strait of Hormuz to the parched Rhine.

The canal loses 50 million gallons of water whenever a ship passes through, and is replenished by Lake Gatún, its main reservoir. El Niño spells dryness in Panama. Rainfall between May and August was 34% below the historical average.

The canal’s operator said this month it would reduce the maximum number of vessel transits from 36 to 32 by mid-September. The average auction price for ships using the largest locks surged to $2.5 million in recent weeks from typical levels around $800,000 as shippers race to beat the drought. The canal was already unusually busy as shippers avoided Hormuz. (…)

Elsewhere, excess precipitation is the problem. Chilean copper producer Antofagasta reduced its production forecast after a freak storm deposited 5 million cubic meters of snow into its Los Pelambres mine in July, causing a stoppage.

The mine was beneath an atmospheric river that inundated much of Chile, a rare occurrence that meteorologists said was consistent with a strengthening El Niño.

The lost supply squeezes an already tight market. Copper prices have been setting records, boosted by surging demand from electrification and the metal-intensive data-center build-out.

El Niño could deliver more disruption. In the last episode, from 2023 to 2024, drought sapped hydropower output in Zambia, hitting copper producers. Analysts at research firm CRU said dry weather associated with El Niño is already affecting river-borne logistics at a major mine in Papua New Guinea. (…)

But economists say the overall impact is likely to be less growth and more inflation, notably in Asia’s emerging economies. A recent Bloomberg Economics study found that consumer prices increase nearly 2 percentage points in Indonesia and the Philippines after an El Niño-influenced drought.

Most exposed are millions of farmers already reeling from higher fertilizer and diesel costs because of the Iran war. At the end of July, conditions around the world were generally positive for wheat, maize, rice and soybeans, according to a recent report by an international crop-monitoring group, but it warned of growing dryness in Asia’s rice fields. India’s monsoon rain is running 13% behind the average level for this time of year. (…)

Economists at S&P Global Ratings said preparatory measures, from larger grain reserves to investments in water management, should shield exposed Asian economies—even if “El Niño’s wrath is unavoidable.”

Concerns El Niño will hit harvests are boosting prices for some agricultural commodities, including cocoa and sugar. Some big producers and crop buyers insist they are well prepared. Chocolate producers such as Hershey have said the cocoa market is better supplied now than it was before the last El Niño, when heavy rain followed by drought battered two key producers, Ivory Coast and Ghana. A Hershey representative said that El Niño doesn’t always mean a bad West African crop, and that the company is diversifying its sourcing. (…)

• War, Weather Push Crop Prices to Biggest Monthly Gain Since 2012

The Bloomberg Agriculture Spot Index, which tracks 10 major products, is up more than 13% in August as of Friday, heading for the steepest gain since July 2012. Wheat has been one of the biggest drivers, with prices rece ntly reaching a three-year high as Black Sea port attacks slash shipments from a major growing region. Sugar and cocoa are also up about 20% as a strengthening El Niño fuels weather worries.

While it can take time for pricier crops to feed through to supermarket shelves, the gains come on top of rising energy and transport bills driven by the war in Iran. That’s fueling worries about the cost of everyday pantry staples from bread to meat and dairy.

For wheat, grain exports from Ukraine and Russia have slowed as both sides strike each other’s ships and ports. Russia is also preparing to escalate attacks after concluding that negotiations for a peace deal have reached a dead end, Bloomberg reported last week.

Together, the two nations account for more than a quarter of the world’s wheat exports, as well as large amounts of barley, corn and sunflower oil. That’s leaving few obvious options to fill the gap, Lachstock Consulting said in a Monday note. Unsold grain is piling up, and Ukraine’s agriculture ministry expects farmers to plant less winter-wheat for the 2027 season.

“Argentine quality is questionable, Canada has limits, Australia has export capacity constraints and US wheat is increasingly the expensive residual supplier,” Lachstock said. “Unless Black Sea exports begin flowing again, the market increasingly looks to be dealing with a multi-season supply issue rather than a short-term logistics problem.”

Poor weather has been another headache, with US and European corn harvests both hit by summer heat waves. A powerful El Niño is also set to pose risks to crops into next year. That has boosted commodities like cocoa, with concerns over how the weather phenomenon will impact crop development in the top growing region of West Africa.

New York sugar futures are up about 20% in August, the most since 2015, as major producer India faces tight stockpiles just as demand climbs for the festival season. The government recently took the rare step of allowing some duty-free imports in an effort to curb prices.

Renewed tensions in the Middle East are also reviving worries about fuel and fertilizer flows, vital inputs for the world’s farmers. The US struck Iranian rocket launchers over the weekend, its first military action against the country in weeks.

Trump Takes the Oil in Venezuela The deal recalls the famous Cuba scene in ‘The Godfather Part II.’

The WSJ Editorial Board:

President Trump has long said he favors “taking the oil” when the U.S. intervenes overseas, and now he is doing so in extraordinary fashion. His deal announced late Friday with unelected President Delcy Rodríguez for rights to 65 billion barrels of Venezuelan oil reserves looks less like a normal commercial transaction than it does the famous scene of U.S. businessmen meeting with the Cuban strongman in “The Godfather Part II.” (…)

The legal authority for this is far from clear, since the Defense Department is investing in a foreign entity. Can the Pentagon Office of Strategic Capital take such equity stakes?

Why is the Pentagon even playing in global oil markets when it has enough to do buying new weapons in short supply and reforming its broken procurement process? (…)

The politics of all this are even more complicated, to put it mildly. The U.S. government is essentially getting in bed with a foreign dictator and her favored capitalist. Any foreign firm that invests will have all three as de facto partners, but Mr. Trump will be out of office in 2029 and the heavy-handed U.S. role might not play well over time in Caracas.

The oil deal will prop up Ms. Rodríguez, at least in the short term, and that may be part of Mr. Trump’s motivation. She has courted the President to survive in power and to stave off demands from the opposition to establish a process for new elections. Mr. Trump likes nothing better than a leader, elected or not, who bends to his wishes.

It’s notable that both the Venezuelan opposition and Ms. Rodríguez’s left-wing allies are criticizing the deal. The Bolivarian left views it as a concession to North American imperialism, and it will play that nationalist card if there is another election.

The democratic opposition views the deal as the act of an illegitimate president who has no right to turn over national resources to a business pal and a foreign government. It also fears that the deal will make it less likely that Mr. Trump and Secretary of State Marco Rubio will press for new elections. (…)

Much still isn’t known, but this all looks like an example of the Trump Administration extending its creeping crony statism beyond U.S. shores. In the “Godfather” saga, the Cuban dictator got a golden telephone from his visitors but was soon out of power.

Iran’s fight may be about more than the regime survival…

How the AI Investment Craze Is Keeping the Global Economy Afloat

(…) “We have literally a tug of war between the negative supply shock from the Middle East and the positive demand shock from AI,” Kristalina Georgieva, managing director of the International Monetary Fund, said this week. As data centers spring up in more countries, AI “is becoming a growth engine for the global economy,” she said.

The question now for many economists is, will it last? And how vulnerable will the global economy be if this critical engine of demand falters?

The uncertainty about AI-led growth comes on top of nervousness about a prolonged conflict in the Middle East exhausting energy stockpiles, straining government budgets and firing up inflation. (…)

But the AI bonanza has emerged as the big offset to the growth squeeze from the energy crunch.

ING estimates the AI frenzy accounts for around a third of the U.S. economy’s recent growth, as the data-center build-out sucks in semiconductors, electronics, cables, metals and machinery from around the world.

Exports from China were up by a quarter in July compared with a year earlier, while exports from Japan rose 22%. Taiwan’s exports were up by a third and South Korea’s jumped 63%.

Even smaller economies such as Thailand are reporting bumper exports as the fever intensifies. Singapore’s government upgraded its growth forecast for the year, saying it expects its economy to expand up to 5.5% this year, from 4% previously, as it too benefits from rampant demand for semiconductors and other AI-related components. (…)

The IMF’s Georgieva sounded a note of caution even as she noted the spreading gains from AI, saying the technology’s rollout and its economic effects are still uncertain. She mentioned financial stability risks, alluding to what many investors and analysts see as a bubble in AI-related firms’ soaring stocks and expanding borrowing.

She warned against complacency from policymakers too eager to put all their eggs in the AI basket. Already, many economists say countries in Asia, above all China, are too dependent on exports and not enough on internal sources of growth such as consumption to power their economies.

“Growth is becoming much more narrow,” said Max Zenglein, Asia Pacific senior economist at The Conference Board, an economic research group. That is a risk, he said, as after a spell of breakneck growth in AI demand “we are reaching a point where at least we are going to see a slowdown.”

Obviously, somebody in DC is AI lucky.

Ed Yardeni:

Nvidia’s Q2 earnings report suggests that the AI spending boom is broadening. The company forecast 70% revenue growth next fiscal year, far above Wall Street’s 45% expectation, and said growth would be even stronger if supply constraints were less severe.

Significantly, non-hyperscaler revenue grew 138% y/y, outpacing hyperscaler revenue growth of 102% y/y, as demand broadened beyond mega-cap tech into AI-native startups, sovereign cloud builds, and traditional enterprise IT.

Such a strong outlook from the company at the center of the AI ecosystem is a powerful vote of confidence in the AI spending boom. As CEO Jensen Huang put it, the “AI infrastructure buildout is at full steam.” That suggests AI-related investment should remain a significant tailwind for both economic and earnings growth. (…)

July durable goods orders rose 1.1% m/m, beating expectations and marking the fourth increase in the past five months. Excluding transportation, orders increased 0.4%, while core capital goods orders (nondefense ex-aircraft), a key gauge of business investment, rose 0.2% m/m and 12.9% y/y. Core capital goods shipments, which feed directly into GDP, jumped 1.4% in July.

 

Note that Ed’s charts use nominal dollar data. Inflation in IT, particularly in data center related stuff, has accelerated to high double-digits in 2026. Nvdia just announced a 17% hike in its chips for 2027.

 

Ed continues:

Four of the five regional business surveys conducted monthly by five of the 12 Fed district banks are now available for August. The Regional Manufacturing PMI rose to 20.5 in August, its highest reading since late 2021, suggesting that the national ISM M-PMI likely remained comfortably in expansion territory during the month. (…)

AI is not helping the trade deficit, is it? Most of what goes into data centers is imported.

According to the Advance Economic Indicators Report, the goods trade deficit widened by $17.4bn to $118.8bn (seasonally adjusted) in July, against consensus expectations for a slight narrowing. Goods exports declined by $6.0bn to $199.4bn, largely driven by a decline in industrial supplies. Goods imports increased by $11.4bn to $318.2bn, driven by a sharp increase in capital goods. (Goldman Sachs)

On the six-month anniversary of the Iran war, divisions appear on Wall Street over the trajectory for oil prices

(…) “From the moment President Trump told CBS News on March 9 that ‘I think the war is very complete, pretty much,’ a corner of the market has held a steadfast belief in an imminent end to the war,” said a team of strategists at RBC Capital Markets led by Helima Croft.

Throughout the monthslong crisis, though, the strategists said they’ve been flashing back to the 2003 Iraq war and then Defense Sec. Donald Rumsfeld’s comment that “it could last six days, six weeks, I doubt six months.” The conflict lasted nearly nine years. (…)

“Hence, we suspect that we will be writing another anniversary note come February, even if the conflict remains primarily a grey-zone one, and the Strait remains in a Schrödinger situation,” the strategists said. (…)

While some oil has managed to make it to the market, Croft said they are more worried about liquefied natural gas, which is “stranded with transits near zero” at the six-month mark of the conflict. “Diesel and European gas markets look set for a serious stress test as summer sunsets, given the ongoing attacks on both Middle Eastern and Russian refineries as well as the sustained loss of Qatari LNG exports,” they said.

That’s one point that Goldman Sachs agrees on. “We continue to see greater price upside to European natural-gas prices and deferred oil product prices in persistent disruption scenarios than for crude,” said the said a team led by co-head of commodities research, Daan Struyven, in a note to clients late Thursday.

The margin that oil refiners demand for producing gasoline, heating oil and diesel has been rising to historic highs, pressuring for one prices of petroleum products used by U.S. consumers.

As for crude, Struyven and his team estimated that oil leaving the Gulf via all modes is roughly at 15 to 16 million barrels per day, which is 7 to 8 million barrels per day below pre-war levels, but 5-6 million barrels per day above the March trough. (…)

“The rise in dark crossings by specialized shippers and in ship-to-ship transfers shows that producers and shippers are adapting to the Mideast conflict,” said a team led by Daan Struyven in a note to clients on Friday.

While shipping markets continue to price in disruptions well into 2027, “potential additional dark flows and price-sensitive China net crude imports may moderate the upside to crude oil prices even if Mideast disruptions last longer.”

• Pakistan Says Not Bound to Accept Unilateral Sanctions on Iran

Pakistan said it is not “obliged to” comply with unilateral sanctions on Iran unless they are imposed by the United Nations, signaling a willingness to continue trade after the US warned of economic penalties against countries doing business with Tehran.

Islamabad is following bilateral agreements with Iran and while trade between the two neighbors remains robust, “there is a desire to expand,” Pakistan’s Foreign Ministry spokesperson Tahir Andrabi said at a weekly briefing Thursday.

Pakistan relied on its ties with Iran to negotiate the release of oil tankers early on during the conflict. The two countries have also agreed to complete a free-trade agreement to increase bilateral commerce by more than threefold to $10 billion.

Pakistan has been trying to balance its relations with the US and Iran during the war. The country has strengthened its ties with the US during President Donald Trump’s second term, particularly after emerging as a key mediator between Tehran and Washington.

Last week, Pakistan’s army chief was in Iran as part of negotiations to end the Middle East conflict after tensions flared up again. (…)

• Trump Administration in Advanced Talks for Stake in Venezuelan Oil Fields Deal would give U.S. direct stake in 17 of Venezuela’s most promising oil-and-gas fields that house some 90 billion barrels of crude oil reserves

If the two countries reach a deal, it could pave the way for independent U.S. energy producers to become involved in oil production in the Latin American country, according to people familiar with the matter. Details are still being worked out, and the deal could fall apart, these people said. Axios reported on the talks earlier Thursday.

The deal would give the U.S. a foothold in at least 17 of Venezuela’s most promising oil-and-gas fields, housing some 90 billion barrels of proven reserves, almost twice that of the U.S. Venezuela says it has 300 billion barrels of proven reserves, the largest in the world. (…)

The country’s oil production has been slow to ramp up. It is pumping about 1.1 million barrels a day, roughly in line with last year’s figures. (…)

Direct U.S. involvement in foreign oil production is rare. During World War II, the administration of Franklin D. Roosevelt created a state company to get foreign reserves and sought to buy a U.S. company that had concessions in Saudi Arabia. But the effort ultimately failed. (…)

“An illegitimate interim government with an illegitimate hydrocarbons law has no legitimacy to strike this unconstitutional deal,” Ricardo Hausmann, a Harvard University economist and former government official in Venezuela, wrote on X. “It will be a fiasco for all involved, starting with [Secretary of State Marco Rubio].”

Bloomberg:

Venezuela is considering whether it should quit OPEC, according to people familiar with the matter, potentially delivering a fresh blow to the oil cartel it helped create more than six decades ago. (…)

A Venezuelan exit would heighten doubts over whether OPEC — led by Saudi Arabia — can continue to hold together and influence crude prices. A further breakdown could plunge members into a fierce contest for market share, reprising the brief price war of 2020.

Taking a stake in Venezuela’s oil reserves would mark an almost unprecedented intervention by the US in another country’s economy, but it’s also in keeping with Trump’s so-called Donroe Doctrine of extending American influence in the Western Hemisphere.

He has described Venezuela as the 51st state and said the US controls its oil.

Some American officials envision an oil powerhouse built from an alliance between the US and Venezuela that would greatly diminish OPEC’s influence, one of the people said. (…)

The “resilient consumer”. For how long? ING:

Real personal spending for July was 0.0% MoM, confirming the soft start to the quarter from the consumer despite real household disposable income doing OK, rising 0.4% MoM. This result is the savings ratio rising from 2.6% to 3%.

In terms of economic activity, the key story is real household disposable income – that is, incomes after tax and adjusted for inflation. It is the primary driver of spending power and suggests underlying consumer fundamentals remain under pressure.

The chart below shows that RHDI has effectively flatlined for well over a year and is well below where the pre-Covid trend suggests we should be. Employment growth has been modest while wage growth has slowed and elevated inflation prints have eroded spending power. Tax changes (no tax on tips/overtime etc), have not meaningfully improved the situation.

This is key to explaining the K-shaped consumer narrative. Middle and lower-income households are reliant on income to fund their spending and are under financial pressure – hence the low savings ratio of 3% versus the 6% long run average and the fact credit card and auto loan delinquencies are at or close to all-time highs.

However, higher income households have more spare capacity with surging household wealth encouraging the top 20% of households by income to continue spending – remember the Federal Reserve states that the top 20% of households by income hold 70% of household wealth.

2026: A Climate ‘You Are Here’ Last part of the ‘Super El Niño’ series: Simple pictures to show where we are now

This is the last in a brief series that looks at this year’s ‘Super El Niño’ and what it may mean. The first, “A Record El Niño Is Coming,” noted the record El Niño sea surface temperature. The second, “More on the Next ‘Super El Niño,” took a deeper dive into what’s coming this year and next, and discussed what we’re in for just a little bit down the road, the next ten years or so. (…)

Two more kids die. And one more theater show.

Last year, I got a text from a friend in public health.

They were checking into a hotel in West Texas to help contain a measles outbreak that would eventually balloon to more than 900 known cases—in reality, likely 10 times that number. This 20th century disease, which we had once eliminated as a country, had already killed one child. The local health department was small and chronically underfunded, so it quickly got overwhelmed by the most contagious virus on earth. Epidemiologists from across the country came to support the community, which is typical in these types of situations.

They turned around at the front desk, and standing right behind them, checking into the same hotel, were representatives of the Children’s Health Defense. The most powerful anti-vaccine lobby founded by RFK Jr. had also arrived at the exact same time to check into the same hotel and “respond” on the ground.

What followed turned into national theater: grieving families’ names dragged into public view just hours before they’d buried their own kids; a bold, deceptive information campaign seeding narratives about whether the child died “with” measles or “from” it, as if the distinction mattered to the parents; a hospital that had tried to save those children getting targeted for failing to do the impossible; physicians on camera pushing vitamin A as a substitute for a vaccine; and schools touting, with pride, the lowest vaccination rates in the country.

Two more kids died this week in Pennsylvania.

A lot of details aren’t clear, but the theater proceeded and is now doused in jet fuel: politicians with the mic infecting every level of the response, from the highest offices to the local coroner; massive information voids cracked wide open through poor communication; a backdrop where trust in vaccines is being directly targeted; and very little trust between each other as individuals and the systems around us.

This list accomplishes a lot of things, except one: it doesn’t center the children getting sick and the suffering community. And until this country gets its act together, we will continue to lose lives…