Market Trends | August edition

The dog days of summer are here but investors have had no shortage of developments to digest including: FOMC meetings, continued tensions in the Middle East, and a blockbuster earnings season.

The first month of the third quarter was characterized by extraordinary market dispersion as crowded positions unwound very quickly. Some headlines from July 2026¹:

• The Nasdaq 100 had its worst month relative to the S&P 500 since 2002.
• The NYSE Semiconductor Index had its worst month since 2008 and entered bear market territory just weeks after hitting record highs in the last week of June.
• South Korea’s KOPSI Index, which had more than doubled in the first six months of 2026, suffered its worst month since the 2008 Global Financial Crisis.

August has brought some relief, at least so far. Chip stocks enjoyed a reversal of fortune in the first week of the month, helping propel the S&P 500 back into record territory while the Nasdaq posted its best week since April, rising 5%.²

Despite recent market volatility, our conviction remains strong. Much of the market movement this summer appears to have been driven not by deteriorating fundamentals but by positioning and technical factors.

The fundamental backdrop continues to improve: S&P 500 year-over-year earnings are tracking 28% higher vs. the second quarter of 2025, surpassing the estimated growth rate of 21%.³

Still, there are macroeconomic causes for concern. The first week of August culminated with a weaker-than-expected U.S. jobs report. The U.S. economy shed 23,000 jobs in July, compared with expectations for an 83,000 gain.⁴ In addition, the prior two months of job gains were revised lower, wage growth slowed and the labor force participation rate fell to 61.4%, its lowest in more than five years.⁵

Markets scaled back expectations for a September rate hike in reaction, lowering the implied probability to roughly 44% from nearly 60% before the jobs report.⁶

The latest jobs data and July’s CPI report, which showed annual core inflation rising 2.5%⁷, may provide the Fed greater flexibility to keep rates on hold. But they do not materially alter the inflation outlook, in our view.

The steepening of the Treasury yield curve — even as markets scaled back expectations for a September rate hike — suggests investors are distinguishing between weaker near-term labor market data and persistent longer-term inflation risks. We see structural forces — including AI-related investment, constrained labor supply and the potential pass-through of higher energy prices amid the conflict in the Middle East — keeping inflation closer to 3% than the Fed’s 2% target.

After tracking oil prices through the early stages of the Middle East conflict, market attention shifted back to the Fed in July.

The Fed held policy unchanged at its July 29 meeting, as the majority of market participants expected.¹² But three officials dissented in favor of a hike and Fed Chair Kevin Warsh offered almost no forward guidance in his press conference, “a choice we consider especially prudent at these uncertain times.”¹³

This choice is apparently resulting in more uncertainty and volatility in rate markets, which bond market participants may need to get used to.

In the aftermath of Warsh’s press conference following the FOMC meeting, the 30-year Treasury yield moved above 5.2%, the highest level since 2007.¹⁴

The good news is June and July inflation data revealed a sharp cooling following energy-driven shocks to the upside since March. We expect the Fed will hold rates steady for the foreseeable future as we await updates on Warsh’s five new task forces and continue monitoring oil prices.