Weekly Wisdom: Consumer Strength and AI Continue to Drive Growth

The Consumer Continues to Surprise to the Upside

One of the biggest developments over the past week has been the dramatic improvement in the Atlanta Federal Reserve’s GDPNow forecast. Just before second quarter GDP forecast was released, the model was tracking growth at roughly 1.5%. Following the GDP report, the estimate climbed as high as 6.2% before eventually settling at 5.9% on August 4, three times higher than the Bloomberg consensus of approximately 2.1%.¹

Much of the increase came from the model’s estimate for Personal Consumption Expenditures (PCE), which rose from 1.67% to 3.17% between forecasts. Combined with a lower PCE deflator and other early economic data, the model mechanically boosted its estimate for real GDP growth. Along with this increase in spending, The University of Michigan Consumer Sentiment Index rose to 55.2 in July, its highest reading in five months, while inflation-adjusted consumer spending increased 0.4% in June, matching its strongest monthly gain in nearly a year.² American Express reinforced consumer confidence messaging during earnings, reporting U.S. customer spending increased 11%, with retail spending up 13%, restaurants up 10%, travel and entertainment up 10%, and airline spending posting its strongest growth in six quarters. Global travel bookings increased 22%, while four of its five largest international markets also produced double-digit spending growth, reinforcing that this is not simply a U.S. story.³ The broader economy is reflecting resilience as well. The Services PMI expanded during six of the first seven months of 2026, while Manufacturing PMI has expanded in every month this year, reaching as high as 55.1 in May.⁴

We can also look directly at the banking system for another read on consumer health. Bank of America’s charge-off ratio declined to 0.47% during the second quarter, down from 0.55% a year ago.⁵ Wells Fargo saw an even larger improvement, with its net charge-off ratio falling to 0.34% from 0.44% last year.⁶ Capital One provided perhaps an even clearer signal with credit quality continuing to outperform expectations with Capital One seeing declining delinquencies and charge-offs year over year in their legacy Capital One and Discover portfolios. Additionally, provisions for credit losses declined 74% year over year to $2.99 billion, well below the $3.99 billion estimate.⁷ This is an important distinction. Consumers are not simply spending more while allowing their financial health to deteriorate. We are seeing double-digit spending growth alongside improving credit trends and lower charge-offs at several major lenders highlighting that consumers remain an important source of strength for the economy heading into the second half of the year.

AI Investment Is Becoming AI Monetization

Another major aspect of the increasing momentum of GDP is the continued expansion and monetization of AI. This quarter highlighted that the scale of AI developments is still impressive, with Microsoft reporting its fastest Azure growth since 2022 at 43%, while demand continues to exceed available supply. Microsoft 365 Copilot has now reached 30 million paid seats, with net seat additions more than doubling sequentially. Commercial bookings grew 18% excluding OpenAI, while remaining performance obligations climbed to $678 billion. Microsoft is also moving beyond simply charging customers for Copilot seats toward a seat plus consumption model.⁸ This is important because it allows revenue to increase as customers use AI more heavily rather than requiring Microsoft to continually sell additional licenses. Management’s underlying spending remains unchanged, expecting fiscal 2027 capex to increase year over year as demand continues to exceed available capacity.

Amazon delivered an equally impressive quarter. AWS revenue accelerated 36.7% year over year, its fifth consecutive quarter of accelerating growth, while adding $4.6 billion sequentially, roughly 80% larger than any previous quarterly increase. Backlog reached $496 billion with triple-digit growth, and AWS is now operating at a $169 billion annualized revenue run rate. Management even suggested AWS could eventually become a $1 trillion run-rate business, with more than 80% of IT spending still sitting on-premises. Impressively, this growth is coming alongside improving profitability. AWS operating margins reached 39%, increasing 650 basis points year over year, supported by software optimization, custom silicon adoption, better server utilization, and other efficiency gains. Amazon’s custom chip business alone has surpassed a $25 billion annual run rate and is growing at a triple-digit pace. AI is even improving Amazon’s consumer businesses, with AI-enabled shopping experiences converting 48% better and generating 21% more spending than traditional users.⁹

Alphabet reinforced the same message. Revenue increased 24% year over year to $119.8 billion, exceeding expectations of $117.06 billion, while Google Cloud revenue surged 82%. Shares initially reacted negatively as capital expenditure expectations climbed to as much as $205 billion for the year, but accelerating Cloud adoption and revenue growth are positive signs that enterprise AI adoption is expanding and that these investments are increasingly being monetized.¹⁰ Collectively, the numbers are enormous. Amazon increased its capex guidance to $220 billion, Alphabet could spend as much as $205 billion, and Microsoft’s underlying investment plans remain intact with additional growth expected next year. Yet these companies are simultaneously producing accelerating cloud growth, enormous backlogs, expanding AI adoption, and in Amazon’s case significantly higher margins. The AI buildout remains alive and well as we are increasingly seeing the monetization that can justify the spending.

The AI Buildout Is Spreading into Industrials

The other important takeaway that the benefits of AI spending are continuing to spread across the economy. The physical infrastructure necessary to support these investments must be built, powered, cooled, connected, and maintained, and the companies responsible for doing that are reporting extraordinary demand. Quanta Services delivered 27% organic growth while revenue increased 41%, EBITDA increased 59%, and earnings grew 70%. More importantly for what comes next, backlog increased 49% across its electric and utility businesses and the company raised guidance.¹¹ GE Vernova reported 12% organic growth alongside 37% backlog growth,¹² while Eaton generated 14% organic growth with backlog also increasing 37%.¹³ Vertiv delivered another 18% of organic growth with its backlog estimated to be around $20 billion.¹⁴ Caterpillar provides another example of just how strong industrial demand has become. Backlog reached $72.1 billion during the quarter, increasing an extraordinary $9.4 billion sequentially.¹⁵ In other words, demand continues to arrive considerably faster than these businesses can fulfill it, which is showing up in spending, revenues, earnings, margins, and backlogs today.

These backlog numbers may ultimately be one of the most important indicators coming out of earnings season. Hyperscalers are telling us demand exceeds their available capacity and they need to spend more, while the industrial companies responsible for building that additional capacity are simultaneously telling us their backlogs continue to grow. The results on both sides of the AI infrastructure ecosystem confirm the same trend. These market trends alongside a strong consumer point toward substantially stronger third quarter growth.

Stephanie Link’s TV Schedule

[1] Atlanta Federal Reserve, as of August 4, 2026
[2] Bloomberg, as of August 5, 2025
[3] Bank of Americal 2Q26 Earnings Call, as of July 14, 2026
[4] Bloomberg, as of August 5, 2026
[5] Bank of Americal 2Q26 Earnings Call, as of July 14, 2026
[6] Wells Fargo 2Q26 Earnings Call, as of July 14, 2026
[7] Capital one 2Q26 Earnings Call, as of July 21, 2026
[8] Microsoft 2Q26 Earnings Call, as of July 29, 2026
[9] Amazon 2Q26 Earnings Call, as of July 20, 2026
[10] Alphabet 2Q26 Earnings Call, as of July 22, 2026
[11] Quanta Services 2Q26 Earnings Call, as of July 30, 2026
[12] GE Vernova 2Q26 Earnings Call, as of July 22, 2026
[13] Eaton 2Q26 Earnings Call, as of July 31, 2026
[14] Vertiv 2Q26 Earnings Call, as of July 29, 2026
[15] Caterpillar 2Q26 Earnings Call, as of August 4, 2026