August 2026 Commentary

August extended the resilience of U.S. equities, with major U.S. equity indexes posting positive returns during the month. The S&P 500 advanced 2.6%, while the Nasdaq Composite gained 3.9% and the Dow Jones Industrial Average rose 1.3%. At the same time, investors continued to navigate persistent inflation, elevated valuations, higher oil prices, and renewed geopolitical uncertainty, creating a more complex market and monetary-policy backdrop. ^1,2

The artificial intelligence investment cycle remained a central driver of market performance. After several months of heightened scrutiny surrounding AI valuations and the enormous capital requirements necessary to support data center and semiconductor infrastructure, investors returned to many of the sector's strongest growth companies. The Federal Reserve's own assessment reinforced the scale of this investment cycle: Chairman Kevin Warsh noted that business investment in equipment and intangibles was growing at roughly 9% annually, with more than half of 2026's capital expenditure growth attributable to AI-related investment. At the same time, S&P 500 corporate profits had increased more than 20% over the prior year, providing fundamental support for elevated equity valuations. ¹

Macroeconomic conditions, however, became increasingly complicated as the month progressed. Economic activity remained resilient, but inflation continued to run above the Federal Reserve's 2% objective, while labor-market conditions showed signs of cooling. At the annual Jackson Hole Federal Reserve Meeting, Chairman Warsh emphasized that inflation remained the Fed's primary concern and argued that monetary policy should remain focused on ensuring that elevated price pressures do not become entrenched. Markets subsequently increased the probability of a September rate hike, creating a more restrictive interest-rate backdrop even as economic growth and corporate earnings remained supportive. ^1,2

Geopolitical developments added another layer of complexity. Renewed conflict involving Iran and disruption around the Strait of Hormuz pushed crude oil prices sharply higher toward the end of August, reviving concerns that energy costs could slow the progress on inflation and force the Federal Reserve to maintain or increase interest rates for longer. The combination of higher oil prices and rising Treasury yields pressured rate-sensitive areas of the market and contributed to a sharp divergence in sector performance during the month. Nevertheless, the broader market absorbed these pressures relatively well, highlighting the underlying strength of corporate earnings and investor demand for equities. ²

Sector performance reflected a selective market environment. Energy led the S&P 500 with a 6.5% gain amid higher crude prices and geopolitical developments, while Technology rose 6.2% amid continued attention to AI infrastructure and semiconductor demand. Materials and Health Care advanced 5.8% and 4.8%, respectively, while Financials gained 1.2%. The S&P 500 returned 2.6% for the month. ⁴

Credit markets remained resilient in August despite a more challenging interest-rate environment. The Bloomberg U.S. Corporate Index gained approximately 0.4%, while the Bloomberg U.S. Corporate High Yield Index advanced roughly 1.0%. Investment-grade spreads ended the month near 78 basis points over Treasuries, essentially unchanged, while high-yield spreads tightened approximately 18 basis points to 261 basis points. ^3,24 The tightening in spreads could indicate that investors did not perceive a material deterioration in the underlying creditworthiness of corporate borrowers. This was consistent with relatively stable credit conditions during the month, despite higher interest rates and ongoing economic uncertainty.

Corporate issuance was another important development. U.S. corporate issuance reached approximately $164 billion in August, a record for the month.¹⁹ Much of the attention centered on large technology companies raising significant amounts of debt to finance artificial intelligence infrastructure. The enormous capital requirements associated with data centers, power generation, networking equipment, and semiconductor infrastructure are increasingly moving beyond internally generated cash flow and into corporate debt markets. While these companies generally maintain exceptionally strong balance sheets and investment-grade ratings, the sheer volume of new issuance is beginning to test investor capacity. ²⁰ Reuters reported that AI-related corporate debt issuance had reached approximately $220 billion in 2026, compared with only $12.5 billion during the comparable period a year earlier. ²⁰

This development creates an important distinction within the credit market. While credit conditions remained relatively stable in August, higher borrowing costs may present greater challenges for highly leveraged and lower-rated issuers than for companies with stronger balance sheets. This could lead investors to place greater emphasis on credit quality and refinancing needs when evaluating corporate borrowers. ³

One of the most closely watched events of August was the Federal Reserve’s annual Jackson Hole Economic Policy Symposium, held August 27–29 in Jackson Hole, Wyoming. Hosted by the Federal Reserve Bank of Kansas City, the symposium brings together central bankers, policymakers, economists, and academics from around the world to discuss major economic and monetary-policy issues. While Jackson Hole is not a Federal Reserve policy meeting and does not produce an interest-rate decision, speeches from the Fed Chair and other policymakers historically provided important insight into the central bank’s thinking. The 2026 symposium was particularly significant because it marked Kevin Warsh’s first appearance as Fed Chair and came at a time when investors were increasingly uncertain about the Fed’s willingness to respond to persistent inflation. The official theme this year was “Financial Innovation: Implications for Payments and Policy,” but monetary policy and the inflation outlook ultimately dominated investor attention. ^5,6,7

Heading into Jackson Hole, investors were looking for clarity after a confusing July FOMC meeting. The Fed had left its federal funds target unchanged at 3.50%–3.75%, but the decision was unusually divided: three voting members preferred a 25-basis-point increase. The Fed acknowledged that economic activity remained solid, productivity and capital investment were strong, and employment conditions were stable, while also stating that inflation remained elevated relative to its 2% objective. Importantly, the FOMC minutes showed that several policymakers already favored a more restrictive policy stance because they believed price pressures were broadening. Market expectations had therefore become increasingly sensitive to the possibility of a rate hike, even though the Fed itself had not committed to one. ²²

The uncertainty was compounded by Warsh’s communication style. Following the July meeting, the new Fed Chair had deliberately avoided providing the type of detailed “forward guidance” that markets had become accustomed to under previous Fed leadership. Investors entered Jackson Hole wanting what one strategist described in a Reuters interview as a “GPS on the economy,” particularly an explanation of how the Fed would respond if inflation remained above target. The stakes were therefore unusually high: markets were not simply looking for a signal about the September meeting; they were attempting to understand how Warsh intended to conduct monetary policy more broadly. At the time, futures markets were assigning only about a 35% probability of a September rate increase, reflecting significant uncertainty over whether the Fed would tolerate inflation remaining above target or move toward tighter policy. ^5,7

Warsh ultimately delivered a more hawkish message on inflation than markets had anticipated, although he stopped short of explicitly committing to a September rate hike. The central message was that the Fed's 2% inflation objective remains firm. Warsh stated that the PCE price index's 2% target is a “firm, fixed target” and emphasized that “price stability is not self-executing.” More importantly, he established a clear threshold for future policy: “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.” In other words, the Fed would not simply assume that inflation would naturally return to 2%; policymakers would require convincing evidence that underlying price pressures were moving in that direction. ^1,5,7

That distinction was significant because recent inflation data had shown some improvement, but not enough to satisfy the new Fed Chair. Warsh acknowledged that inflation had moderated somewhat during the summer but argued that the improvement was insufficient to establish a durable downward trend. As he put it, the available data “do not tell me that underlying trends have meaningfully improved.” At the same time, Warsh characterized the economy as resilient and financial conditions as insufficiently restrictive. That combination—solid economic activity, stable employment, financial conditions that remain relatively loose, and inflation still above target—creates a policy environment in which the Fed has room to maintain or increase rates without immediately threatening economic growth. ^1,5,7

Perhaps equally important was what Warsh did not do. He did not provide a specific timetable for rate increases or disclose a detailed “reaction function” describing precisely how the Fed would respond to individual economic reports. Instead, he doubled down on his preference for allowing markets to interpret incoming economic information rather than attempting to guide expectations through extensive Fed communication. This represents a meaningful departure from the increasingly explicit forward guidance that characterized previous Fed regimes. Warsh's argument is that excessive guidance can constrain policymakers and cause markets to become overly dependent on the Fed's forecasts rather than economic fundamentals. For investors, however, the trade-off is greater uncertainty and potentially greater volatility around each inflation, employment, and growth report. ^1,5,7

The market reaction demonstrated just how consequential the speech was. Immediately following Warsh’s remarks, the yield on the two-year Treasury rose approximately 11 basis points to 4.34%, reflecting increased expectations for near-term monetary tightening. More importantly, market-implied odds of a September rate hike increased from approximately 35% before the speech to 60% afterward. Longer-term Treasury yields moved much less dramatically, suggesting that investors interpreted Warsh's comments primarily as a warning that the Fed may need to tighten policy in the near term rather than the beginning of a prolonged tightening cycle. ^5,7

From an investment perspective, the most important takeaway from Jackson Hole was therefore not that the Fed had decided to raise rates—it had not—but that the burden of proof has shifted. Investors had increasingly been positioning for eventual rate cuts, assuming that moderating inflation and a resilient-but-normalizing labor market would eventually allow the Fed to ease policy. Warsh's message challenged that assumption. Unless inflation demonstrates convincing and sustained progress toward 2%, the Fed remains willing to keep rates elevated and potentially raise them further. This creates a higher hurdle for long-duration assets whose valuations depend heavily on lower discount rates, while increasing the relative importance of current earnings, free cash flow, balance-sheet strength, and reasonable valuations. ^1,5

July inflation data, released in August, showed a modest reacceleration in monthly price growth following June’s decline. According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) increased 0.1% month-over-month on a seasonally adjusted basis, following a 0.4% decline in June. On a year-over-year basis, headline CPI eased to 3.4% from 3.5% in June. Shelter remained the largest contributor to the monthly increase, rising 0.1% and accounting for roughly two-thirds of the overall gain. Food prices also increased 0.1%, while food away from home rose 0.3%. Energy provided an offset, declining 1.5% during the month. ¹⁰

Underlying inflation remained somewhat firmer. Core CPI, which excludes food and energy, increased 0.2% in July after remaining unchanged in June, while the year-over-year rate eased to 2.5% from 2.6%. Several service categories—including medical care, airline fares, communication, education and recreation—recorded monthly increases, while motor vehicle insurance declined after several consecutive months of increases. The July data therefore offered a mixed inflation picture: headline inflation continued to moderate on an annual basis, but underlying price pressures remained elevated, particularly within services. ¹⁰

Energy prices remained an important source of year-over-year inflation despite falling during July. The energy index was up 14.7% over the 12 months ended July, with gasoline prices rising 24.6% and fuel oil prices increasing 39.1%. Fuel oil is a relatively small component of the CPI basket, but its sharp increase highlights the broader impact of higher petroleum prices across the economy. More broadly, elevated gasoline and diesel costs can raise transportation and distribution expenses, creating potential second-order pressure on the prices of goods that rely heavily on freight and logistics. ^8,9,10

Consumer spending in July also showed a notable shift in the composition of household demand. According to the Bureau of Economic Analysis, personal consumption expenditures (PCE) increased $36.3 billion, or 0.2%, during the month, but the headline increase masks a significant divergence between goods and services. Spending on services increased $86.2 billion, more than offsetting a $49.9 billion decline in spending on goods. At the same time, real PCE was essentially flat, increasing less than 0.1%, suggesting that much of the nominal increase reflected higher prices rather than a substantial increase in the volume of goods and services consumed. ¹¹

The composition of spending may indicate that consumers are becoming more deliberate in allocating discretionary dollars. Financial services and insurance and health care were among the largest contributors to the increase in services spending, while spending on gasoline and other energy goods, recreational goods and motor vehicles declined. The broader takeaway is that the consumer remains a source of economic resilience, but the composition of spending is becoming increasingly important: households continue to spend, but a greater share is flowing toward essential and service-related categories while purchases of larger discretionary goods appear softer. ¹¹

The University of Michigan’s final Consumer Sentiment Index fell to 51.7 in August, down from 55.2 in July and 11.2% below its level a year earlier. The decline interrupted the modest improvement seen during the prior two months and left sentiment at historically weak levels, underscoring the persistent strain households feel from elevated prices and diminished purchasing power. While views improved across income, education, wealth, age, and political groups earlier in the summer, August’s decline suggests that consumers remain cautious about the economic outlook. Five-year expected business conditions reached a 12-month high, but remained well below their historical average, highlighting a more constructive long-term outlook that has yet to translate into stronger near-term confidence. ¹²

Inflation expectations remained a particular concern. Year-ahead inflation expectations eased to 4.2% in August from 4.6% in July but remained well above the 3.4% recorded in February before the Iran conflict and above all readings during 2024. Long-run inflation expectations held at 3.3%, modestly above the 2.8%–3.2% range observed throughout 2024. Roughly half of consumers continued to cite high prices as a source of financial pressure, down from 56% in July but still substantially above historical norms. Since 2022, an average of 41% of consumers have cited high prices as a strain on their finances, compared with just 7% in 2019. The persistence of these concerns suggests that, despite moderating headline inflation at times, households continue to perceive the cumulative effect of higher prices as a meaningful constraint on purchasing power and discretionary spending. ¹²

From an economic perspective, the survey presents a mixed consumer backdrop. Households have not shifted into outright pessimism, but confidence remains depressed and inflation continues to dominate perceptions of personal financial health. This is consistent with the broader spending data: nominal consumption continues to grow, but real consumption has been much more subdued as households devote a greater share of their budgets to essential goods and services. For investors, the distinction is important. A resilient consumer remains supportive of economic growth, but persistently weak sentiment and elevated inflation expectations reinforce the risk that higher prices and borrowing costs could increasingly constrain discretionary spending. ^11,12

The July employment report showed continued moderation in labor-market conditions, with non-farm payroll employment declining by 23,000, following an average monthly gain of just 34,000 over the prior 12 months. The unemployment rate edged down to 4.1%, but the underlying employment data pointed to a labor market that is losing momentum. Employment declined in local government education (-50,000) and retail trade (-19,000), while employment in financial activities fell another 14,000. Financial-sector employment has now declined by 121,000 positions since its May 2025 peak, reflecting continued weakness in credit intermediation and insurance. Health care remained a source of job creation, adding 22,000 positions, although that was well below its 36,000 monthly average over the prior year. ^13,14

The composition of the report suggests that the labor market is cooling rather than collapsing. Private-sector employment remained positive overall, with gains in areas including health care, construction, professional and business services, information, and manufacturing, although these gains were increasingly offset by weakness in retail, financial activities, and government. ^13,14

Wage growth also moderated. Average hourly earnings for private nonfarm employees increased just $0.02 in July to $37.62, bringing year-over-year wage growth to 3.2%. For production and nonsupervisory employees, average hourly earnings rose four cents to $32.40. Importantly, inflation continued to absorb much of the nominal wage growth: real average hourly earnings declined 0.2% from July 2025 to July 2026, while real average weekly earnings increased only 0.1%. This suggests that, despite continued nominal wage gains, purchasing-power growth remains limited and could constrain consumer spending if inflation remains elevated. ^13,14

Overall, the July report adds to evidence of a gradual labor-market cooling. Hiring has slowed materially from earlier in the expansion, wage growth is moderating, and several traditionally important employers—including retail and financial services—are reducing headcount. At the same time, health care and several private-sector industries continue to add jobs, while unemployment remains relatively low at 4.1%. For investors, the key issue is whether this normalization remains orderly or develops into a broader deterioration in employment and household income. At this stage, the data point more toward slower economic growth and a more balanced labor market than an imminent recession, but the declining pace of job creation warrants continued monitoring. ^13,14

The Conference Board Leading Economic Index (LEI) is designed to provide an early indication of turning points in the business cycle, historically leading broader economic activity by roughly seven months. In July 2026, the LEI increased 0.2% to 99.5, marking its fourth increase in the past six months. More importantly, the index's six-month growth rate turned positive for the first time in more than four years, which may suggest that the deterioration in forward-looking economic conditions has begun to stabilize. The improvement, however, remains modest and does not yet indicate a broad-based acceleration in economic activity. ¹⁵

Financial components provided a modest but broad-based tailwind. The interest-rate-spread component—the spread between the 10-year Treasury yield and the federal funds rate—was the largest financial contributor, adding 0.11 percentage points. A wider spread generally reflects a less restrictive yield curve and can support future economic activity through improved credit conditions and investment incentives. The Leading Credit Index contributed 0.05, indicating that credit conditions remained supportive rather than signaling a meaningful deterioration in financial stress. The S&P 500 added another 0.02, reflecting continued strength in equity prices and investors' expectations for corporate earnings and economic activity. Collectively, these measures lead to relatively constructive financial conditions heading into the second half of the year. ¹⁵

The non-financial components were mixed, with several indicators of business and employment activity improving while consumer expectations remained a significant drag. Building permits contributed 0.15, suggesting modest improvement in the forward outlook for residential construction, while average weekly initial unemployment claims contributed 0.16. Because claims are incorporated inversely into the LEI, fewer initial claims represent a positive signal for future employment conditions. The ISM New Orders Index added 0.03, while manufacturers' new orders for consumer goods and materials contributed 0.01, pointing to modest underlying demand. Average weekly manufacturing hours were unchanged, while manufacturers' new orders for non-defense capital goods excluding aircraft contributed -0.03, suggesting that business investment outside the current AI-related capital-spending cycle remains less robust. ¹⁵

The clearest weakness remained consumer expectations for business conditions, which detracted 0.19 percentage points in July and 1.26 points over the prior six months. This represents an important divergence within the economy: financial markets, housing activity, employment indicators and several measures of business demand have improved, while households remain considerably less confident about the economic outlook. The Conference Board's separate July Consumer Confidence survey reinforced this weakness, with confidence declining to 90.8 as consumers reported worsening assessments of current business conditions and a less optimistic outlook for the future. ¹⁵

Taken together, July's LEI presents a cautiously constructive but uneven economic picture. The return to positive six-month growth may indicate that the prolonged deterioration in forward-looking indicators has begun to stabilize, while the breadth of positive contributions is consistent with a more stable near-term economic outlook. However, weak consumer expectations and relatively modest manufacturing and capital-goods activity indicate that growth remains uneven. The Conference Board expects real GDP growth of approximately 1.9% in both 2026 and 2027, with business investment—particularly AI-related investment—providing an important source of support while elevated living costs continue to weigh on household spending. For investors, the data supports a continued focus on economic resilience rather than assuming either a sharp acceleration or a recessionary downturn. ¹⁵

September will place the Federal Reserve and the path of interest rates at the center of investor attention. The Federal Open Market Committee is scheduled to meet September 15–16, with updated economic projections and a press conference following the decision. The meeting will be particularly important after the more hawkish tone at Jackson Hole, where Fed Chair Kevin Warsh emphasized that inflation remains above the Federal Reserve’s 2% objective and that further progress cannot be assumed. With three FOMC members dissenting in favor of a rate increase at the July meeting, the September decision carries greater significance than a typical policy meeting. Investors will focus not only on the rate decision itself, but also on the updated projections and guidance regarding the balance between inflation and employment. From a portfolio-management perspective, we believe positioning portfolios around a single policy outcome is less important than maintaining appropriate exposure to duration, credit quality, and equities that can withstand a range of interest-rate environments. ^1,5,16

Consumer spending and the broader economy will provide another important test of economic resilience. August retail sales are scheduled for September 16, followed by housing data on September 17 and additional manufacturing and durable goods data later in the month. The September 30 release of August personal income and spending data will provide another important read on household demand, including the Federal Reserve's preferred PCE inflation measures. Recent economic indicators have pointed toward moderation rather than contraction, but consumer confidence and real spending remain important areas to monitor given elevated prices and borrowing costs. A sustained slowdown in discretionary consumption would reinforce concerns about economic growth, while resilient spending would provide evidence that the economy can continue absorbing restrictive financial conditions. ^17,18

Beyond the macroeconomic data, investors will begin looking ahead to the third-quarter earnings season. With the S&P 500 having posted substantial gains and valuations remaining elevated in several areas of the market, continued earnings growth will be increasingly important to justify current pricing. Management commentary on AI-related capital spending, demand, margins, pricing power, and free cash flow will be closely watched, particularly across technology and other sectors exposed to the ongoing investment cycle. At the same time, tighter financial conditions and elevated long-term Treasury yields could create a greater distinction between companies with strong balance sheets and durable cash flows and those more dependent on external financing. ²¹

Overall, September is likely to be defined by the interaction between inflation, employment, Federal Reserve policy, and corporate earnings expectations. The market enters the month with a resilient economic backdrop but limited room for conflicting signals, particularly given elevated valuations and the recent rise in longer-term interest rates. We remain particularly attentive to the long end of the Treasury yield curve, where recent developments may reflect investors demanding greater compensation for inflation uncertainty, fiscal concerns, and the increased supply of government debt. We therefore remain cautious about extending duration simply in anticipation of lower interest rates and continue to favor a measured approach to interest-rate exposure.

Importantly, higher long-term yields do not necessarily invalidate the constructive equity outlook. Corporate earnings remain strong, with second-quarter results substantially exceeding expectations and analysts projecting continued earnings growth through the remainder of the year.[21] AI-related investment, productivity gains, and resilient economic activity remain important potential catalysts for earnings growth. If inflation moderates, energy prices stabilize, and the economy continues to expand without a material deterioration in employment, the combination of stronger earnings and improving monetary-policy visibility could provide an important catalyst for equities to move higher—even if the Federal Reserve proceeds cautiously.

Our portfolio-management approach reflects this balance. We continue to seek participation in the secular growth trends supporting corporate earnings while avoiding excessive reliance on multiple expansion or a rapid decline in interest rates. Within equities, we are emphasizing companies and strategies where earnings growth, free cash flow, balance-sheet strength, and fundamental business momentum provide tangible support for valuations. At the same time, we are actively monitoring concentration, sector leadership, and individual security valuations so that capital can be redeployed when opportunities emerge.

We also view periods of volatility as an important part of active portfolio management rather than a reason to retreat from equities. A meaningful decline in rates, clearer evidence of disinflation, continued strength in corporate earnings, or a reduction in geopolitical risk could improve the market's risk-reward profile. Conversely, a sustained move higher in long-term yields, renewed inflationary pressure, or deterioration in earnings expectations would warrant greater selectivity. Our objective is not to predict which scenario occurs, but to maintain the flexibility to respond to either one. Through disciplined rebalancing, security selection, and ongoing monitoring of economic and market conditions, we seek to maintain exposure to potential opportunities while remaining attentive to the risks associated with the current market environment.