Q2 US GDP’s Stealthy Strength

Headline Q2 US GDP growth decelerated to 1.5% annualized from Q1’s upwardly revised 2.1%, but that doesn’t tell the story.^[i] Under the hood, America’s main economic engines are revving. Although backward looking, last quarter’s stronger-than-appreciated growth shows why the bull market is on firmer footing than most coverage contends.

As Exhibit 1 shows, headline GDP (green bars) indeed slowed from Q1. But almost all of that was due to inventory drawdowns and trade. While inventory changes are open to interpretation, demand outpacing production likely drove destocking, shaving -0.7 percentage point from GDP growth.^[ii] Purchasing managers’ indexes (PMIs) hinted at this throughout the quarter. Consider what the Institute for Supply Management noted in June’s manufacturing PMI report: “the Customers’ Inventories Index remained in ‘too low’ territory, contracting at a faster rate. A ‘too low’ status for the Customers’ Inventories Index is usually considered positive for future production.”^[iii] It wouldn’t surprise us if restocking soon kicked in as a tailwind. Additionally, imports “subtracted” -1.5 percentage points from GDP growth (the same as in Q1), but this, too, reflected solid domestic demand (more on this soon).

Exhibit 1: Private Sector Demand Accelerated Under the Hood

Source: FactSet, as of 7/30/2026. Real GDP and final sales to private domestic purchasers, Q1 2024 – Q2 2026.

For a better read of underlying economic activity that matters to markets, we prefer looking at GDP’s pure private sector domestic demand components: personal consumption expenditures (PCE, aka consumer spending), business investment and residential investment. As Exhibit1 also shows, US household and business demand’s 3.3% annualized growth (gold bars) is the fastest in more than three years (since Q1 2023).^[iv] PCE leapt 3.2% annualized from Q1’s 0.5%, led by a 6.8% surge in durable goods spending (think cars, furniture and equipment)—mirroring production.^[v] Meanwhile, businesses continued equipping themselves generously, as capex rose another 8.4% annualized on top of Q1’s heady 10.6%.^[vi]

Unsurprisingly, information processing equipment kept gaining ground. Indeed, that is a big reason imports swelled. Though lots of technology hardware may be designed in America, much of it is made overseas. But that shows you why imports’ “subtraction” is always net neutral for GDP—those same imports count positively in business investment (and consumer spending).

Investment wasn’t just about servers and chips kitting out new data center builds, though. Joining the party—and by far the fastest GDP line items: Industrial equipment grew 29.0% annualized and transportation equipment 29.2%, the latter after three quarters of contraction.^[vii] Now, as that last clause implies, growth in these categories tends to be lumpy—don’t extrapolate any trend. Still, strong and broad-based business investment disproves the widespread notion that AI is America’s only capex driver. That is also yet another clue that claims AI alone is driving the market are off. The bull market, like US economic growth, is so much broader than people appreciate.

Among other interesting nuggets, residential investment also rose 1.5% annualized, its first increase in five quarters.^[viii] This small category isn’t a swing factor, but its nascent rebound suggests high existing home prices may finally be starting to spur construction, giving would-be buyers some hope. And as for fears of high gas prices tanking consumer spending, those fell flat. Fuel buying fell -5.0% annualized in Q2, a -0.1 percentage point subtraction from headline GDP.^[ix] This shows how conservation won out, as spending elsewhere continued apace. Last quarter wasn’t a one-off, isolated incident, either. Despite energy prices’ gyrations, their effects usually round to zero. There are only a handful of quarters this century when fuel consumption exceeded plus or minus 0.2 percentage point contributions to GDP growth. It is very rarely a major factor. This is a good reminder not to overrate pump prices despite endless reporting and attention.

Instead, focus on the bigger picture: Households and businesses, overall and on average, remain in fine shape, helping drive broad corporate earnings growth—much to stocks’ delight. Of course, that isn’t what headlines usually lead with. Most folks doing ok! may not grab eyeballs, but we find that makes it all the more important for investors to not lose sight of what the economy’s main fundamental drivers truly are.