Weekly Investment Perspective

U.S. equities edged higher during a quiet week as encouraging inflation data and continued support from corporate earnings offset another rise in long-term interest rates. The S&P 500 gained 0.36% and the Nasdaq Composite added 0.14%, each extending its winning streak to three weeks, while the Dow Jones Industrial Average declined 0.56%. The Russell 2000 rose 1.12% as reduced expectations for another near-term Federal Reserve rate increase provided some support to smaller companies.

July’s inflation reports offered welcome evidence that price pressures are moving in a more favorable direction, but the Fed remains some distance from declaring mission accomplished on meeting its 2% target. Headline CPI eased to 3.3% year over year from 3.5% in June, while core inflation slowed to 2.5%. Producer prices were unchanged in July and rose 4.7% from a year earlier, down from 5.5% in June, although the 4.2% increase in core producer prices showed that underlying pressures have not disappeared. The Fed’s preferred core personal consumption expenditures measure is also expected to remain above 3%, leaving policymakers focused on whether the recent improvement can be sustained.

The inflation data arrived alongside a weaker-than-expected retail sales report. Sales fell 0.6% in July versus expectations for a modest increase, but the details were less concerning than the headline. Online spending pulled back after promotional events were shifted into June, lower gasoline prices reduced nominal spending at service stations, and auto sales retraced part of the prior month’s gain. The report points to slower consumer momentum entering the third quarter, not a collapse in demand. A broadly balanced labor market and gains in household wealth continue to support spending, although the benefits remain uneven and lower-income consumers face greater pressure.

Together, the softer inflation and spending data reduced the perceived need for an immediate policy response. Futures markets now assign roughly a 30% probability to a quarter-point rate increase in September, according to CME FedWatch, while a full quarter-point increase is not priced until January of next year. Even so, longer-term borrowing costs continue to move in the opposite direction. The 10-year Treasury yield ended the week near 4.70%, up from 4.44% at the start of the quarter and 4.17% at the beginning of the year. Concerns about persistent inflation, large federal borrowing needs, and growing debt issuance tied to the AI infrastructure buildout have kept pressure on the long end of the yield curve. As the AI investment cycle absorbs the operating cash flow available for the buildout and becomes increasingly dependent on external financing, competition for capital could remain elevated. If long-term yields continue to rise, they could become a more meaningful headwind to equity valuations, even without additional near-term Fed tightening.

For now, corporate earnings remain an important counterweight. Results have generally reinforced the resilience of business demand and profit growth, although high expectations have left less room for disappointment in some areas of the market. The durability of earnings growth will become increasingly important if falling interest rates do not provide a valuation tailwind.

The consumer will remain in focus this week as Home Depot, Lowe’s, Target, TJX, Walmart, and Ross Stores report results. Investors will be looking beyond the quarterly numbers for evidence on transaction volumes, discretionary spending, differences across income groups, and companies’ ability to absorb or pass through higher costs. The Federal Reserve’s July meeting minutes and preliminary August manufacturing and services surveys will provide additional perspective on the policy debate and the economy’s underlying momentum.

The recent data leave the market with a reasonably constructive but less comfortable balance: inflation is improving, the consumer remains intact, and earnings are growing, but long-term financing costs continue to rise. That backdrop favors maintaining diversified exposure to durable businesses while remaining disciplined on valuation and attentive to balance-sheet and financing risk.

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