US economic growth accelerated in the second quarter of 2021, ahead of estimates, as the inflation rate stayed elevated, according to a BEA report released on Thursday.

In Q2, real gross domestic product (GDP), which is a measure the value of all goods and services sold within one calendar year, increased at 6.7% an average annual rate. It was slightly above the initial estimates of 6.6%, released in August. However, it is higher than 6.3% that was reported in the prior quarter.

The Q2 GDP upward revisions reflect several factors. They include an increase of Personal Consumption Expenditures, driven by increased spending on goods and services (led primarily by accommodation and food) and services (led mainly by clothing and footwear), as well as “other” nondurable goods such pharmaceutical products and clothing. The most important component of GDP is PCE, which has the greatest impact on GDP growth.

The increase in fixed non-residential investment was also driven by increased spending on equipment, mainly transportation equipment. There were also higher expenditures in intellectual property (led by research and software).

The increase in exports was also due to higher expenditure on goods and services, which were driven by nonautomotive motor goods.

Two indicators of inflation in the BEA report show that America’s old enemy is still a problem. Expectations were met by a 6.2% increase in the GDP Deflator. This metric adjusts GDP for price change.

The quarterly pace of PCE prices, which is closely monitored by the Fed and measures inflation, was 6.5%. This again complies with expectations.

What does the BEA Report mean for Wall Street

A stronger economy with higher inflation will be a hindrance to debt markets. These factors could force the Federal Reserve into accelerating tapering and eventual raising short-term rates. This will drive bond prices down and yields up.

Additionally, yields that are higher will be beneficial for the dollar because foreign capital will continue to flow to the U.S. as a result.

Stocks face a disadvantage due to higher yields on bonds. The future value of earnings from corporations is reduced by higher bond yields. These bonds are discounted in standard valuation models.

Positive news for corporations is the stronger GDP data. A higher price per unit is good news, for example, for companies selling consumer goods. Companies that are involved in capital goods sales will also benefit from higher fixed investments.

Although it is unclear if the tailwinds are going to prevail and drive equities higher, there is one certainty: Wall Street volatility will be driven by the fear that they will miss out (FOMO), and the fear of being left behind (FOLO).

Disclosure: Panos Mourdoukoutas held no shares in any of the stocks at publication.

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