Real GDP growth in the second quarter was reported this week to have increased by 4.1%—the fastest pace of expansion since third quarter 2014 and far above the average 2.2% pace the economy has set during the current recovery. We are now well into the second-quarter s earnings season, with 246 S&P 500 companies having reported earnings, and the average non-weighted gain so far looks to have been about 27%. If this does indeed turn out to be the actual quarterly growth rate, it would be the largest quarterly increase since 2010. Such strength—coupled with extremely low unemployment, low inflation, faster economic growth, high levels of confidence, and accommodative financial conditions—strongly suggests that we currently are in the cyclical sweet spot. In this week's Economics Weekly, we discuss what's driving the current strong earnings growth, and where the headwinds are likely to come from in the coming year or so.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.