Earnings Strength Lifts Markets as Rates and Energy Risks Persist
EXECUTIVE SUMMARY
Markets mostly advanced in August as strong corporate earnings, continued artificial-intelligence investment, and resilient business activity outweighed softer labor and consumer data. The S&P 500 gained 2.7%, International Developed equities gained 2.5%, and Emerging Market Equities advanced 4.1%. Small Cap Equities were one of few asset classes to fall this month. Credit markets also improved, while commodities and precious metals extended their year-to-date leadership. The principal counterweight was interest rates: Treasury yields remained elevated as inflation, fiscal borrowing, and renewed energy risk kept Federal Reserve policy expectations unsettled.
Market Review
Asset Class Performance – Returns as of 08/31/2026
For informational purposes only. Past performance is not indicative of future results. Source: Morningstar; Returns for periods longer than 1 year are annualized.
August delivered broad gains across risk assets despite a more difficult rate backdrop. Strong second-quarter earnings, continued investment in artificial intelligence, and resilient business activity helped the S&P 500 advance 2.7% and reach new highs during the month, before pulling back slightly towards the end of August.
International results were positive but uneven. Emerging-market equities gained 4.1% as a softer U.S. dollar and strength in technology-oriented Asian markets supported returns. Commodities again stood out, led by precious metals and firm energy prices. Longer-term government yields remained elevated, but credit markets were supported by healthy corporate fundamentals and steady investor demand.
Economic Update
Key Economic Indicators
For informational purposes only. Past performance is not indicative of future results.
The U.S. economy continued to expand, although the data showed a widening gap between healthy business activity and a softer labor market and consumer. The second estimate for Q2 real GDP was an annual growth rate of 1.5% in the second quarter. July industrial production rose 0.2%, and the August ISM Manufacturing PMI strengthened to 54.6. In contrast, July payrolls declined by 23,000, prior months were revised lower, and retail sales fell 0.6% from June.
Inflation moderated but remained above the Federal Reserve's objective. Headline CPI rose 3.4% over the year ended July, down from 3.5% in June, while core CPI eased to 2.5%. Core PCE inflation held at 3.3% year-over-year. Consumer confidence and sentiment weakened in August as households remained concerned about living costs, energy prices, and the economic outlook.
Federal Reserve
The Federal Reserve did not meet in August, leaving the federal funds target range at 3.50% to 3.75%. Minutes from the July meeting highlighted an unusually divided Committee and the tension between weaker employment data and inflation that remains above target. Policymakers continued to emphasize that decisions would depend on the full set of incoming information.
Chair Kevin Warsh reinforced the Fed's commitment to its 2% inflation objective at Jackson Hole. Markets interpreted the tone as less accommodative than expected, lifting the probability of a September rate increase and pushing short-term yields higher late in the month. The policy outlook therefore remains highly sensitive to labor, inflation, and energy-price data.
Equity Markets
Earnings & AI Leadership Broaden
Corporate earnings remained the primary support for equities. Strong reports from many tech companies capped a healthy second-quarter earnings season, while software, communications, materials, energy, and health-care companies also contributed to market gains. The broader participation suggested that investors were rewarding both AI infrastructure spending and companies demonstrating practical productivity or revenue benefits from AI adoption.
Valuations and financing costs still warrant discipline. Large growth companies remain sensitive to capital-spending expectations, and the rise in long-term yields raises the discount rate applied to future earnings. Small caps (S&P 600) fell -0.6% in August and lagged large caps, reflecting their greater exposure to borrowing costs. Emerging markets remained a bright spot, aided by dollar weakness and strength in Asia.
Diversifying Strategies
Commodities Extend Their Lead
Commodities produced another strong month. The broad Bloomberg Commodity Index rose 7.4%, extending its year-to-date gain to roughly 32.1%. Gold advanced nearly 10% and silver more than 15% as investors focused on geopolitical risk, fiscal sustainability, and the long-term value of the U.S. dollar. Oil held near multi-month highs amid the continuing standoff between the United States and Iran.
These gains reinforced the diversification potential of real assets, while also illustrating the two-sided impact of higher commodity prices. Energy and metals supported related equities and inflation-sensitive assets, but elevated fuel and input costs remained a risk to consumer spending and profit margins. Private credit continued to offer income potential, with underwriting quality and liquidity discipline remaining essential.
Fixed Income
Income Helps Offset Rate Volatility
Fixed income results were mixed but generally improved from July. The 10-year Treasury yield ended August near 4.75% after considerable intra-month volatility. Broad investment-grade bonds posted a modest gain, supported by coupon income, while longer-duration government bonds remained sensitive to inflation, fiscal borrowing needs, and changing expectations for Federal Reserve policy.
Credit markets were more constructive. U.S. high-yield bonds gained 1.0% as spreads narrowed and corporate earnings remained healthy. Investment-grade corporate bonds also advanced, although heavy issuance limited relative performance. With spreads tight and yields elevated, income remains attractive, but security selection and interest-rate sensitivity continue to matter.
Outlook
Theme #1: Earnings Remain the Market's Foundation
Healthy profits and continued AI-related investment supported equities and helped broaden market leadership in August.
Theme #2: Growth is Resilient but Uneven
Business activity remained firm, while weaker hiring, retail sales, housing, and consumer sentiment signaled areas of moderation.
Theme #3: Inflation is Improving Slowly
Headline and core CPI eased in July, but core PCE inflation and commodity prices kept the Fed focused on its 2% objective.
Theme #4: Higher-for-Longer Rates Remain a Valuation Risk
Elevated Treasury yields and fiscal borrowing needs may continue to pressure duration-sensitive assets and highly valued equities.
Theme #5: Diversification is Providing Multiple Return Drivers
Gains across U.S. equities, emerging markets, high yield, precious metals, and commodities demonstrated the value of differentiated exposures.
Conclusion
August extended the market's 2026 advance. Strong earnings, a widening set of AI beneficiaries, and resilient business activity outweighed softer labor and consumer data. U.S. large cap and emerging market equities posted solid gains, credit markets advanced, and commodities delivered another strong month.
Our outlook remains constructive but more balanced. Inflation is easing only gradually, long-term interest rates remain elevated, and geopolitical developments continue to influence energy markets. Returns may therefore remain uneven and increasingly dependent on earnings quality, valuation, and sensitivity to financing costs. History tells us we likely will see volatility pick up in the short term as we work through the midterm elections. As long as any near-term cash flow needs are managed with this short-term volatility in mind, a disciplined approach centered on strategic asset allocation and thoughtful diversification remains appropriate.
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