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- Equities continued to advance in August, supported by earnings growth and broader market participation.
- Long-term Treasury yields climbed to their highest levels in nearly two decades on inflation, fiscal, and financing risks.
- Inflation remains above the Federal Reserve’s (Fed’s) target, and Fed Chair Kevin Warsh has indicated that rates may need to move higher if inflation does not move toward the Fed’s 2% objective.
- Cautious consumers and relatively confident businesses are sending mixed signals about the economy.
- AI-related investment continues to support capital spending across a growing range of industries, but investors are demanding clearer evidence of sustainable cash flow.
- Conflicting signals from stocks and bonds reinforce the importance of diversification and deliberate risk management..
August reinforced the idea of equity market resilience, but rising long-term interest rates introduced an important counterpoint. The S&P 500 Index gained approximately 2.6% in August, while the Nasdaq Composite rose 3.9% and the Dow Jones Industrial Average added approximately 1.3%.1 Treasury yields were also higher by the end of August, with the 10-year Treasury yield near 4.75% and the 30-year yield near 5.25%.2
The seemingly contradictory performance in these two markets raises the question: Why were stock investors comfortable setting records even as long-term bond investors demanded higher compensation for lending? Equity investors responded to earnings growth, business investment, and continued economic expansion, while bond investors focused on inflation, government borrowing, and rising financing costs. Rather than offering conflicting signals, the two markets, each with its own priorities, responded to different aspects of an economy that remains resilient but increasingly unsteady. For investors, the environment reinforces the case for maintaining discipline and balance in portfolios.
August’s equity market gains were notable for their breadth. Benchmarks for large-cap, equal-weight, small-cap, and Dow indexes all reached record highs at different points during the month. Developed and emerging international markets also advanced.1 Returns are becoming increasingly less dependent on one narrow segment of the market, a constructive development for diversified investors.
Market breadth, however, is not the same as indiscriminate buying. While gains were spread across different sectors and market capitalizations, only about half of stocks in the S&P 500 finished the month higher.3 While the energy sector gained the most during the month and technology and software-related stocks rebounded, a large share of companies did not participate.4 This signals increasing selectivity among investors, who are scrutinizing sectors and business models. So even as more parts of the market are contributing to returns over time, not every part will advance at the same time.
Source: YCharts
The Bond Market Repriced the Cost of Capital
In the bond market, short-term rates stayed anchored to Fed policy, but long-term rates rose, steepening the yield curve. The 30-year Treasury yield reached its highest level since 2007.2 Several forces are shaping the long end of the curve at once: inflation uncertainty, elevated government borrowing, concerns about the fiscal path, and significant private-sector capital needs. The Treasury expanded bond buyback operations in August, a step widely viewed by market participants as supporting liquidity at the long end of the bond market.5
Higher long-term rates have implications well beyond the bond market. They raise mortgage costs and make corporate refinancings more expensive. They also weigh on equity valuations, because when a low-risk Treasury bond offers attractive long-term returns, investors are less willing to buy a stock today based on hypothetical profits that may not materialize for a decade or more.
It may help to distinguish what the bond market is and is not saying. Credit spreads remained contained in August, and new issuance stayed healthy.6 This suggests limited concern about companies’ ability to meet their obligations. As such, this does not signal distress, but rather a repricing of the cost of capital. Higher yields also improve the prospective income available from high-quality bonds, although the same rise in yields reduces the market value of bonds already held, and longer-maturity bonds are the most sensitive to that effect.
Source: FRED, U.S. Treasury
Inflation Progress Has Slowed
Inflation remains well below its 2022 peak, but it has moved higher over the past year. Headline PCE inflation stood at 3.7% year over year in July, up from 2.5% a year earlier and well above the Fed’s 2% target.7 In our opinion, the current environment reflects disrupted disinflation rather than the start of a new inflation cycle, though we recognize that the recent direction of travel has been higher and that this view may prove incorrect. Energy remains the swing factor, linking geopolitical developments to inflation expectations and, in turn, to monetary policy. Oil price pressures and supply disruptions will remain a key factor that, alongside other inputs, could delay further progress on inflation.
Fed Chair Kevin Warsh addressed this directly in his August 28th remarks at the Jackson Hole Economic Policy Symposium, where he acknowledged the improvement in recent inflation reports but said they do not demonstrate a meaningful change in underlying trends. Reaffirming the Fed’s commitment to its 2% objective, Warsh indicated that policymakers still have “work to do” if inflation does not move toward that goal clearly and quickly.8 He also reiterated his preference for limiting forward guidance, arguing that the Fed should retain flexibility to respond to incoming data.
Markets read Warsh’s speech as hawkish, and expectations rose for a rate hike at the Federal Open Market Committee’s September 15–16th meeting.9 Incoming employment and inflation data will be instrumental as the Fed determines its next step.
Source: U.S. Bureau of Economic Analysis (BEA), MarketDesk
The Economy Remains Resilient but Increasingly Uneven
The economy continues to expand but, beneath the headline numbers, it is sending mixed signals: households are growing cautious, while business activity and investment remain firm.
July retail sales declined 0.6%.10 Personal income rose faster than spending, and the saving rate increased to 3.0%, as households spent more selectively.7 The labor market, however, showed renewed strength in August. Nonfarm payrolls increased by 162,000, while July’s initially reported decline was revised to a gain of 21,000. The unemployment rate remained low at 4.1%.11 While one stronger report does not necessarily signal a sustained reacceleration in hiring, it reduces concerns that July marked the start of a broader labor-market deterioration and reinforces the economy’s underlying resilience.
On the business side, manufacturing activity strengthened during the month12 and capital spending continues to provide meaningful support for economic growth.13 Economists will be monitoring the divergence between households and businesses over the fourth quarter.
AI Is Becoming a Broader Economic Story
Demand for data centers, computing capacity, networking equipment, power generation, grid infrastructure, and cooling systems remains strong.14 What began as a technology story has also become an infrastructure, energy, and industrial story. This is contributing to broader business spending and economic growth.
The investor conversation is shifting, however. The question is no longer how much will be spent, but which business models and which parts of the value chain can convert that spending into durable revenue and free cash flow. Investors are becoming more selective and are paying closer attention to capital intensity, profitability, and returns on invested capital. Greater differentiation among companies participating in the AI buildout is healthy and could support a more durable market than one that rewards the investment theme indiscriminately.
Portfolio Perspective
Broader equity participation and earnings growth remain constructive. At the same time, elevated valuations may become more sensitive to a higher discount rate. We will monitor the impact of rates on equities over the coming months.
Higher yields have improved the income available from high-quality bonds, but the path of inflation and long-term rates remains uncertain. Portfolios are likely to benefit from careful management of duration and yield-curve positioning. Diversification across asset classes, company sizes, investment styles, sectors, and geographies remains important. Portfolios should remain positioned to participate in continued growth while maintaining sufficient balance to navigate a higher cost of capital.
We caution against making significant portfolio changes in response to a single Fed meeting, oil-price move, or economic release. The current environment is likely to reward disciplined risk management over a concentrated bet on one economic outcome.
Closing Thought
August market performance was not a contradiction. Equity markets reflected resilient earnings, continued business investment, and a broader opportunity set. Bond markets reflected the rising cost of financing deficits and investment while inflation remains above target. Both can be true at the same time.
Fed Chair Warsh’s remarks reinforced the bond market’s message: Inflation remains a real risk, monetary policy may need to stay restrictive, and investors should not assume the Fed will provide a predictable path for interest rates. The economy remains resilient but the signals beneath the surface are becoming more varied. Consumers are showing greater caution, businesses continue to invest, and financial markets are adjusting to a higher cost of capital.
In this environment, the appropriate response is to remain diversified, manage duration and portfolio risk deliberately, and stay focused on long-term objectives.
1 YCharts, August 2026. Index returns shown in text are price returns; Chart 1 shows total returns.
2 U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates, August 2026.
3 S&P Dow Jones Indices LLC, S&P 500 constituent returns, August 2026.
4 S&P Dow Jones Indices LLC, S&P 500 GICS sector indices, August 2026.
5 U.S. Department of the Treasury, announcement of expanded Treasury buyback operations, August 19, 2026.
6 ICE Data Indices, LLC, ICE BofA U.S. Corporate and U.S. High Yield Index Option-Adjusted Spreads; Securities Industry and Financial Markets Association, U.S. Corporate Bond Issuance, August 2026.
7 U.S. Bureau of Economic Analysis, Personal Income and Outlays, July 2026, released August 26, 2026.
8 Board of Governors of the Federal Reserve System, remarks by Chair Kevin Warsh, Jackson Hole Economic Policy Symposium, Federal Reserve Bank of Kansas City, August 28, 2026.
9 CME Group, 30-Day Federal Funds Futures, August 2026; Board of Governors of the Federal Reserve System, Federal Open Market Committee meeting calendar.
10 U.S. Census Bureau, Advance Monthly Sales for Retail and Food Services, July 2026.
11 U.S. Bureau of Labor Statistics, The Employment Situation, July 2026.
12 Institute for Supply Management, Manufacturing ISM Report On Business, July 2026.
13 U.S. Bureau of Economic Analysis, Gross Domestic Product, Second Quarter 2026.
14 U.S. Energy Information Administration, “Data Center Server Energy Use Grows Across the Commercial Building Stock,” May 19, 2026.
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Index Definitions
The Standard & Poor’s (S&P) 500 Index is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market.
The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance.
The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market.
Dow Jones Industrial Average® (Dow Jones or DJIA) is a stock market index representing the price weighted average of 30 large, publicly owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The component stocks are accorded relative importance based on the prices, unlike other indices which weight by market capitalization. The companies in the DJIA are leaders in their industries, and their stocks are widely held by individuals and institutional investors.
The Russell 2000® Index is a capitalization-weighted index designed to measure the performance of a market consisting of the 2,000 smallest publicly traded U.S. companies (in terms of market capitalization) that are included in the Russell 3000® Index.
The MSCI EAFE Index is a stock market index that measures the performance of large- and mid-cap companies across 21 developed markets countries around the world. Canada and the USA are not included. EAFE is an acronym that stands for Europe, Australasia, and the Far East.
The MSCI Emerging Markets is a global stock market index that tracks the performance of large and mid-cap companies across 24 emerging markets. It is maintained by MSCI, formerly Morgan Stanley Capital International, and is used as a common benchmark for global emerging market stock funds. CSP2026283
