Sentiment is negative. The underlying data is more constructive.
There is a lot of noise around the economy and the stock market right now. Consumer confidence is weak. Headlines dwell on inflation, interest rates, government debt, and two wars.
There are real risks, and I’ll cover them below. Still, the hard economic and corporate numbers show an economy that is growing, businesses earning substantial profits, and companies investing for the future.
The Economy Is Still Growing
Real GDP grew at a 2.2% annualized rate in the second quarter of 2026, after 2.5% in the first quarter. The initial estimate for the second quarter was only 1.5%. The third estimate revised it up by 0.7 percentage point on stronger investment, consumer spending, and government spending.
It’s a good reminder not to trust the first headline.
Real final sales to private domestic purchasers rose at a 4.6% annualized rate. This measure strips out inventories, trade, and government, so it is a clean look at underlying domestic demand. It is not what a recessionary economy looks like.
Consumers are still spending. In August, personal consumption expenditures rose 0.9%, and inflation-adjusted spending rose 0.6%.
One caveat belongs in an honest bull case: disposable personal income rose just 0.3%, real disposable income was roughly flat, and the saving rate was about 4.1%. Households spent faster than their real income grew. That isn’t a collapse, but it is a reason to watch income as closely as spending.
Corporate America Is Making Money
This may be the most important part of the story.
Profits from current production reached about $4.71 trillion annualized in the second quarter, up from about $4.33 trillion in the first. Profits are what companies use to invest, hire, buy equipment, and develop new products.
Analysts keep raising expectations. J.P. Morgan reports that consensus 2026 AI-related capital investment has risen from roughly $650 billion at the start of the year to about $800 billion, alongside higher 2026 and 2027 earnings estimates.
Companies are spending real money today.
Businesses Are Investing, Not Retreating
The AI buildout is putting enormous capital into computing power, data centers, semiconductors, energy, and software. Nonfarm business productivity increased 2.2% year over year in the second quarter. AI may be a contributor, but the point is that output per hour is improving at the same time that investment is surging.
Not every dollar of that spending will earn an outsized return. But companies adding capacity, technology, and infrastructure are not behaving as if they expect the economy to fall apart.
The Labor Market Has Cooled, Not Broken
Unemployment was 4.1% in August, unchanged from July, and payrolls rose by 162,000. A recession usually shows up as broad deterioration in jobs, income, and spending. We are seeing continued growth alongside better productivity, which is a powerful combination when it holds.
Inflation: Separate the War From the Trend
Inflation is where headlines and underlying data diverge most. In August, headline PCE inflation was 3.4% from a year earlier, and core, which excludes food and energy, was 3.0%. Both are above the Federal Reserve’s 2% objective.
The second-quarter figures show the split more clearly:
• Headline PCE: 5.0% annualized
• Core PCE: 3.3% annualized
Energy is doing most of the damage.
That energy shock has a cause. Diesel prices have set records in 2026, climbing more than 60% since the United States and Israel struck Iran on February 28, with the national average moving above $6 a gallon in September. Ukrainian strikes have also hit Russian refineries hard. The International Energy Agency estimates Russian refinery throughput fell to about 3.8 million barrels a day in June, the lowest in more than 20 years and roughly 30% below a year earlier, and Russia restricted fuel exports. Analysts generally treat the Iran war as the larger driver, with the loss of Russian diesel exports tightening an already short market.
Headline inflation is carrying a war premium in fuel, while core is the better read on the domestic trend. An energy shock from two wars is not the same as a broad reacceleration in the price of everything Americans buy.
The Stock Market Is a Separate Question
A healthy economy doesn’t automatically mean stocks are cheap.
The S&P 500’s forward multiple has fallen from roughly 23 times earnings to around 19 as real interest rates have risen. That is roughly in line with the 10-year average of about 19, based on FactSet’s forward 12-month P/E, so the market is no longer stretched relative to recent history. It is not cheap relative to longer-term norms, though, especially with Treasury yields this high.
Those yields are high enough to compete with stocks. When investors can earn a meaningful yield on long-term government bonds, equities must offer enough extra return to justify the risk. That is the strongest argument against “the economy is strong, therefore stocks must go higher.”
The economy can be healthy while the market chops sideways or valuations compress. It is why I’m constructive on the fundamentals and selective on price.
The Risks Are Real
• Interest rates. Higher long-term yields pressure valuations and raise borrowing costs.
• Inflation. Core is better than the headline, but 3% is not 2%. If the energy premium lasts, it can leak into wages, transport, and other prices.
• Market concentration. A small number of very large companies account for a significant share of earnings growth.
• AI spending. The investment is enormous, and some of today’s expected revenue is spending circulating among a small set of vendors. Investors will eventually demand evidence of revenue, productivity, and free cash flow beyond that loop.
• Profit margins. Profitability is extremely strong. If margins normalize, earnings growth can slow even as the economy expands.
• Deficits. Large fiscal deficits can keep upward pressure on Treasury yields.
These risks are real, but they are not a bearish thesis. The biggest obstacles are valuation, interest rates, a war-driven energy shock, and how much future growth is already in today’s prices. None of them looks like an economy collapsing.
Watch the Data
There will always be bad headlines, and people predicting the next recession, crash, or bubble. Sometimes they will be right. Investors are better served by separating sentiment from evidence.
Don’t tell me what consumers say. Show me what they spend.
Don’t tell me what companies say about the economy. Show me their earnings and capital spending.
Don’t tell me AI will change the economy. Show me the productivity, revenue, profits, and investment.
And don’t judge the market only by whether it rose today. Look at what you are paying for the earnings.
The data say the U.S. economy is stronger than the pessimism in many headlines suggests. There are legitimate risks, and clients should respect them. But underneath the noise there is growth, strong profitability, heavy business investment, and a chance that AI produces a real wave of productivity.
When I look at the numbers, I see considerably more fundamental strength than weakness.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Economic forecasts set forth may not develop as predicted and there can be no guarantee that any strategy will be successful.
Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA & SIPC.
LPL Tracking# 1185430