MARKETS

August Summary:
Stocks Set New Highs as Investors Look Past Headlines & Focus on Fundamentals

Key Takeaways

• Stocks rebounded to record highs. The S&P 500 gained nearly +3% in August as AI stocks recovered, with breadth remaining healthy, volatility falling, and most major indexes setting new highs.
• Long-term Treasury yields have become a market risk. The 30-year rose above 5.30% due to heavy Treasury issuance and inflation concerns, tightening financial conditions and making bonds competitive.
• The AI boom is becoming a financing story. Nvidia’s results reinforced strong demand, but continued infrastructure spending is driving higher debt issuance and greater competition for capital.
• The Fed is leaning more hawkish as inflation remains sticky. Chair Warsh raised the bar for staying on hold even as softer labor data complicates the outlook.
• Earnings and economic growth remain supportive. The economy is growing, but slower hiring, persistent inflation, and tighter financial conditions leave a wide range of outcomes.

Market Outlook

Bullish Talking Points

• Corporate earnings remain exceptionally strong, with Q2 profit growth running at its fastest pace in years and forward estimates rising. The strength has helped offset elevated valuations by allowing earnings growth to do more of the work.
• The AI investment cycle also remains intact, with strong demand for computing infrastructure supporting continued spending and revenue growth.
• The economy is still expanding despite softer labor data, and business activity continues to improve.
• Market internals are constructive: the S&P 500 returned to record highs in August, breadth remains healthy, the VIX sits near a 2026 low, and equity ETF flows remain positive.
• Credit spreads remain tight as well, suggesting limited financial stress. If earnings growth holds and the economy avoids a sharp slowdown, stocks can continue to grind higher even with rates remaining elevated.

Bearish Talking Points

• Long-term Treasury yields rose throughout August, increasing borrowing costs and making bonds more competitive with stocks at a time when equity valuations remain above historical averages.
• Inflation has reaccelerated across several measures, which increases the risk that the Fed is forced to tighten policy even as the labor market weakens. Job growth turned negative in July, consumer confidence remains weak, and housing continues to struggle under the weight of elevated mortgage rates.
• The AI cycle presents another risk: spending remains strong, but investors still need evidence that the capital being deployed will generate adequate long-term returns, while growing debt issuance increases competition for capital and puts upward pressure on rates.
• Geopolitical risk remains unresolved and could quickly revive the oil, inflation, and interest-rate pressures seen earlier this year. The main risk is that higher rates eventually overwhelm the resilience in earnings and economic growth.
  

Sources:

All data as of last Thursday's market close. The information herein was obtained by Market Desk Research LLC (MDR) from sources which they believe to be reliable, however, they do not guarantee its accuracy. Neither the information, nor any opinions expressed, constitute a solicitation of the purchase or sale of any securities or related instruments. MDR is not responsible for any losses incurred from any use of this information.

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