TEN MONTHS in the past the spectre of recession was haunting company America. Inflation was rampant, earnings had been depressed and the Federal Reserve was quickly tightening the screws. As an alternative, inflation has moderated, the roles market stays tight and recession is not a certainty. The prospect of an elusive “gentle touchdown” has mixed with hype over the productivity-boosting promise of synthetic intelligence (AI) to present buyers a fillip. This yr the S&P 500 index of massive American corporations is up by almost a fifth.

Markets are particularly bullish a few handful of tech corporations and carmakers. These are among the many s&p 500’s most ai-obsessed members, based on our early-adopters index (which takes under consideration components reminiscent of ai-related patents, investments and hiring). And so they have performed properly within the right here and now, too: all reported respectable second-quarter ends in the most recent earnings season. However what concerning the well being of the broad swathes of the American financial system which might be much less affected by the tech hype? Right here the image is extra complicated, however in the end reassuring.

Begin with the dangerous information. A few of the companies least ready for an AI future are struggling within the current, too. Well being-care corporations look sickly: UBS, a financial institution, estimates that their income slumped by almost 30% in contrast with final yr (see chart). CVS Well being, a sequence of chemists (ranked 218th in our AI index), is slashing 5,000 jobs after its earnings sank by 37%.

Vitality corporations made half as a lot cash within the second quarter of 2023 as they did a yr earlier, when Russia’s invasion of Ukraine pushed up oil and fuel costs. With different commodity costs additionally down, partly owing to lacklustre urge for food from a sluggishly rising China, supplies corporations’ income are down by 30%. As a consequence, total earnings for S&P 500 corporations are estimated to have slid by 5% within the second quarter, yr on yr, based on FactSet, a knowledge supplier. That’s the greatest decline since early within the pandemic.

However the ache has principally been concentrated in just a few sectors. Dig into the numbers, and far of the non-AI financial system appears to be like surprisingly strong. Capital-goods producers, reminiscent of Caterpillar and Raytheon (which are available 204th and 341st in our rating), are reckoned to have collectively elevated their revenues by greater than 8% within the second quarter, and their income by twice as a lot—maybe thanks partly to President Joe Biden’s style for industrial coverage.

Even the oil-and-gas giants are doing higher than the headline numbers recommend. The most important of them, ExxonMobil (ranked 236th), made almost $8bn in internet revenue. That’s down by 56% yr on yr however, bar that record-breaking lead to 2022, nonetheless ExxonMobil’s highest second-quarter determine in almost a decade.

The resilience is maybe most evident for companies with fortunes tied to the situation of the American client, who stays in impolite well being. Pedlars of client staples, reminiscent of foodstuffs and family items, noticed their income rise by 5%, yr on yr, based on UBS. For purveyors of non-staple client items, earnings shot up by 40%. On August 1st Starbucks, a coffee-shop colossus (ranked 116th in our AI index), reported a quarterly working revenue of $1.6bn, up by 22%. The subsequent day Kraft Heinz, a vendor of ketchup and baked beans (ranked 253rd), stated it made $1.4bn in working revenue, two and a half instances what it eked out a yr in the past.

Shopper-goods corporations have managed to keep up pricing energy. Confectioners, for instance, are charging 11% extra for sweets than they did final yr, based on the Bureau of Labour Statistics. Hershey (332nd) has offset the rising price of cocoa—after which some. Its working revenue rose by 23%, to $561m. PepsiCo (245th) lifted costs of its gentle drinks and snacks by 15% within the second quarter alone. Its working revenue bubbled up by three-quarters, to $3.7bn. It now expects to extend gross sales by 10% and internet revenue by 12% this yr, up from an earlier forecast of 8% and 9%, respectively.

Individuals aren’t simply spending on sweets and cola. Air journey is recovering quickly, significantly for worldwide journeys. American Airways (266th in our AI index), Delta Air Traces (193rd) and United Airways (183rd) collectively reported internet income of $4.2bn final quarter, essentially the most since 2015. Motels, inundated with leisure and enterprise travellers, get pleasure from robust pricing energy. Hilton, a sequence (ranked a lowly 421st), stated that its income per out there room, a most well-liked business measure, was up by 12%, yr on yr.

How lengthy can the bonanza final? Consumers are regularly drawing down the financial savings they gathered throughout the pandemic, once they obtained stimulus cheques from the federal government however lacked methods to spend them. Between August 2021 and Could this yr, households spent over $1.5trn of those financial savings, based on the Federal Reserve Financial institution of San Francisco.

At that fee they are going to burn via the $500bn or in order that they nonetheless have earlier than the tip of the yr. Though unemployment stays close to historic lows, at 3.5% in July, wage progress has slowed. The resumption of student-loan repayments in October, after the Supreme Courtroom struck down Mr Biden’s plan to cancel some pupil money owed altogether, may see client spending fall by as a lot as $9bn a month, based on Oxford Economics, a consultancy.

If rising rates of interest finally curb demand, corporations will discover it more durable to proceed elevating costs, leaving margins extra susceptible. Increased charges may even knock corporations with weak balance-sheets. Within the first half of this yr 340 corporations lined by S&P International, a credit-rating company, declared chapter, the very best quantity since 2010. Extra may endure the same destiny, particularly if a recession does hit.

That’s not fully out of the query. Goldman Sachs, a financial institution, thinks there’s a 20% probability of a recession in America within the subsequent 12 months. Citigroup, one other lender, expects a downturn initially of 2024. If that occurs, not even the AI-friendliest of corporations will emerge fully unscathed.

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