Finance
GDP surges by 2.8%, giving hope for rate cuts in September
With GDP increasing 2.8% annually, this signals a strong economy. (iStock )
As a welcome surprise, the gross domestic product (GDP) increased 2.8% annually in the second quarter, an advance estimate released by the U.S. Bureau of Economic Analysis found. Generally, a GDP between 2% and 3% signifies a strong U.S. economy, so this is good news for the overall economic outlook. In the first quarter, GDP increased by just 1.4%.
As the GDP increases and the economy evens out, it’s more likely that the Federal Reserve will cut interest rates. This sudden jump in economic growth is signaling that rate cuts may be on the horizon.
“GDP exceeded expectations in the second quarter, restoring faith that the economy is easing into a sustainable level of growth,” America’s Credit Unions Deputy Chief Economist Curt Long said in a statement.”Recent statements from Federal Reserve officials confirm that a rate cut is squarely in view. However, such action is not needed to ward off a recession but is rather a response to the moderation in inflation.”
The increase in real GDP can largely be attributed to an increase in consumer spending, as well as private inventory investments and nonresidential fixed investments.
Consumer spending increased across both the service and goods industries. Health care was one of the higher spend categories in the service industry, along with housing and recreation services. As for goods, motor vehicles and parts contributed most to the GDP growth. Furnishings, household equipment, gasoline and other energy goods also contributed.
“Both an increase in consumer spending on durable goods and business spending on inventories accounted for a substantial part of last quarter’s expansion,” said Mike Fratantoni, Mortgage Bankers Association (MBA) senior vice president and chief economist.
“Weaker net exports reflect a global economy that continues to operate in a lower gear as well as a stronger dollar,” Frantantoni said. “While top line growth is above the pace needed to keep the unemployment rate from rising further, the components do suggest the economy may slow from here.”
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Fed could cut interest rates in September
Consumers have been waiting for federal funds rate cuts that could lower interest rates on products such as mortgages, student loans and other loans. At the beginning of the year, consumers were told there would be an estimated six rate cuts by the end of the year, but that has grown increasingly unlikely.
Thanks to a higher-than-expected GDP report, economists believe September will be the first time the Federal Reserve cuts rates. These experts estimate there’s a 99.8% chance rates will be cut in September.
There’s also a high chance there will be a few more rate cuts by the end of the year. Experts say there’s a 97.4% chance of at least two more cuts by the end of December.
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Recession fears still linger for many Americans
Despite signs that the economy is heading in the right direction, there are still lingering fears that a recession is here or at least on the horizon. About three in five people believe the U.S. is currently in a recession, according to research from Affirm.
The survey asked 2,000 Americans why they lacked confidence in the current economy. Unsurprisingly, inflation and rising costs were the most common reason (68%) consumers believe the U.S. is in a recession. Another 50% think the U.S. is in the midst of a recession because of family members and friends constantly complaining about money problems.
Most respondents believe the recession started about 15 months ago, and don’t expect it to end anytime soon. Consumers believe the economy won’t officially start to recover until at least July 2025. Again, inflation is largely to blame for why these respondents believe there’s currently a recession.
About 68% of Americans said inflation is negatively affecting their future financial plans, making it difficult for them to save for bigger purchases.
“With confidence in the U.S. economy at a low point, consumers are urgently seeking ways to feel in control of their finances,” said Vishal Kapoor, Affirm senior vice president of product. “Amidst these levels of uncertainty and doubt, we believe that the antidote to the current ‘vibecession’ is greater choice and transparency in how people manage their finances.”
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Cybersecurity and enterprise software stocks have been market dogs in 2026, with fears that AI will wipe out a wide range of companies in the enterprise space dominating the narrative. But they snapped a brutal losing streak this past week, joining in the broader market rally that saw all losses from the U.S.-Iran war regained by the Dow Jones Industrial Average and S&P 500.
Cybersecurity has been “a victim of some of the AI-related headlines,” Christian Magoon, Amplify ETFs CEO, said on this week’s “ETF Edge.”
It wasn’t just niche cybersecurity names. Take Microsoft, for example, which was recently down close to 20% for the year. Its shares surged last week by 13%.
A big driver of the pummeling in software stocks was a rotation within tech by investors to AI infrastructure and semiconductors and some other names in large-cap tech, Magoon said, and since cybersecurity stocks and ETFs are heavily weighted towards software companies, they were left behind even as those businesses continue to grow on a fundamental basis.
But Wall Street now has become more bullish with the stocks at lower levels. Brent Thill, Jefferies tech analyst, said last week that the worst may be over for software stocks. “I think that this concept that software is dead, and then Anthropic and OpenAI are going to kill the entire industry, is just over-exaggerated,” he said on CNBC’s “Money Movers” on Wednesday.
“Big Short” investor Michael Burry wrote in a Substack post on Wednesday that he is becoming bullish about software stocks after the recent selloff. “Software stocks remain interesting because of accelerated extreme declines last week arising from a reflexive positive feedback loop between falling software stocks and changes in the market for their bank debt,” he wrote.
The Global X Cybersecurity ETF (BUG), is down about 12% since the beginning of the year, with top holdings including Palo Alto Networks, Fortinet, Akamai Technologies and CrowdStrike. But BUG was up 12% last week. The First Trust NASDAQ Cybersecurity ETF (CIBR) is down 6% for the year, but up 9% in the past week.
Piper Sandler analyst Rob Owens reiterated an “overweight” rating on Palo Alto Networks which helped the stock pop 7% — it is now down roughly 6% on the year. Its peers saw similar moves, including CrowdStrike.
Performance of Global X cybersecurity ETF versus S&P 500 over past one-year period.
Magoon said expectations may have become too high in cybersecurity, and with a crowding effect among investors, solid results were not enough to to push stocks higher. But the down-and-then-back-up 2026 for the sector is also a reminder that when stocks fall sharply in a short period of time, opportunity may knock.
“Once you’re down over 10% in some of these subsectors, you start to see the contrarians start to say, ‘well, maybe I’ll take a look at this,'” Magoon said.
He said AI does add both opportunity and uncertainty to the cybersecurity equation, increasing demand but also introducing new competition. But he added, “I think the dip is good to buy in an AI-driven world,” specifically because the risks to companies may lead to more M&A in cyber names that benefits the stocks.
For now, investors may look for opportunity on the margins rather than rush back into beaten-up tech names. “I think investors are still going to remain underweight software,” Thill said.
But Magoon advises investors to at least take the reminder to keep an eye on niches in the market during pronounced downturns. “The best-performing are often the least bought and do the best over the next 12 months versus late-in-the-game piling on,” he said.
While that may have been a mindset that worked against the last investors into cybersecurity and enterprise software in mid-2025 when the negative sentiment started building, at least for now, it’s started working for the stocks in the sector again.
Meanwhile, this year’s biggest winner is also a good example of what can be an extended trade in either a bullish or bearish direction. Last year, institutional ownership of energy was at multi-year lows, Magoon said, referencing Bank of America data. “Reverse sentiment can be a great indicator,” he said.
But he cautioned that any selective buying of stocks that have dipped does have to contend with the risk that there is a potentially bigger drawdown in the market yet to come in 2026. That is because midterm election years historically have been marked by large drawdowns. “If you think it is bad right now, it could get a lot worse,” Magoon said. But he added that there’s a silver-lining in that data, too, for the patient investor. The market has posted very strong 12-month returns after midterm election drawdowns end. So, for investors with a longer-term time horizon and no need for short-term liquidity, Magoon said, “stick in there.”
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New innovation in the exchange-traded fund industry could come at a cost to investors during extreme conditions.
According to MFS Investment Management’s Jamie Harrison, ETFs involved in increasingly complex derivatives and less transparent markets may be in uncharted territory when it comes to violent downturns.
“Those would be something that you’d want to keep an eye on as volatility ramps up,” the firm’s head of ETF capital markets told CNBC’s “ETF Edge” this week. “As innovation continues to increase at a rapid pace within the ETF wrapper, [it’s] definitely something that we advise our clients to be really front-footed about… Lack of transparency could absolutely be an issue if we’re going to start seeing some deep sell-offs.”
His firm has been around since 1924 and is known for inventing the open-end mutual fund. Last year, ETF.com named MFS Investment Management as the best new ETF issuer.
“It’s important to do due diligence on the portfolio,” he said. “Having a firm that has deep partnerships, deep bench of subject matter experts that plays with the A-team in terms of the Street and liquidity providers available [are] super important.”
Liquidity as the real issue?
Harrison suggested the real issue is liquidity, particularly during a steep sell-off.
“We’ve all seen the news and the headlines around potential private credit ETFs. That picture becomes much more murky,” he added. “It’s up to advisors, to investors [and] to clients to really dig in and look under the hood and engage with their issuers.”
He noted investors will have to ask some tough questions.
“What does this look like in a 20% drawdown? How does this liquidity facility work? Am I going to be able to get in? Am I going to be able to get out? And if I’m able to get out, am I able to get out at a price that’s tight to NAV [net asset value], and what’s the infrastructure at your shop in terms of managing that consideration for me,” said Harrison.
Amplify ETFs’ Christian Magoon is also concerned about these newer ETF strategies could weather a monster drawdown. He listed private credit as a red flag.
“If your ETF owns private credit, I think it’s worth taking a look at, kind of what the standards are around liquidity and how that ETF is trading, because that should be a bit of a mismatch between the trading pace of ETFs and the underlying asset,” the firm’s CEO said in the same interview.
Magoon also highlighted potential issues surrounding equity-linked notes. The notes provide fixed income security while offering potentially higher returns linked to stocks or equity indexes.
“Those could potentially be in stress due to redemptions and the underlying credit risk. That’s another kind of unique derivative,” Magoon said. “I would very closely look at any ETF that has equity-linked notes should we get into a major drawdown or there be a contagion in private credit or something related to the banking system.”
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