Weekly Investment Perspective

U.S. equities finished modestly higher last week as strong corporate earnings continued to support stocks even as the outlook for interest rates became more challenging. The S&P 500 gained 0.5%, the Nasdaq Composite rose 0.9%, and the Dow Jones Industrial Average added 0.5%, while the Russell 2000 fell 1.5%. Software stocks were among the week’s strongest performers as another encouraging round of earnings helped extend the group’s rebound this quarter following a difficult first half stoked by AI disruption fears. The broader market ended the week on a more cautious note, however, after Federal Reserve Chair Kevin Warsh delivered a hawkish message at Jackson Hole, partially offsetting enthusiasm surrounding another remarkable earnings report from Nvidia.

Warsh’s comments pushed Treasury yields higher Friday, particularly at the short end of the curve, and that pressure has carried into early trading this week. The Fed’s annual Jackson Hole symposium receives significant attention because Fed chairs have often used the forum to frame important shifts in their policy thinking. In his first appearance as Chair, Warsh made clear that he remains dissatisfied with the pace of progress on inflation.

In laying out his reasoning, the Fed Chair reaffirmed that the Fed’s target remains 2% inflation as measured by the PCE price index and emphasized that inflation has now remained above target for 65 consecutive months. He acknowledged that recent readings have improved, but argued that “underlying trends haven’t meaningfully improved” and that responsibility for restoring price stability ultimately rests with the Fed. Perhaps most importantly for markets, Warsh said he would be “hard pressed” to characterize current financial conditions as restrictive, pointing to tight corporate bond spreads, resilient business investment, and relatively accommodative lending conditions. Those comments helped push the CME FedWatch probability of a September rate hike to roughly 67%, up from about 40% before the speech.

Last week’s inflation data also kept the focus on the Fed’s price stability mandate. Headline PCE inflation remained at 3.7% year-over-year in July, while core PCE held at 3.3%. Both remain well above the Fed’s target, and revisions to prior months pointed to somewhat firmer underlying inflation than previously estimated. At the same time, some of the recent pressure has come from goods prices affected by tariffs, energy and other supply factors that could moderate over time.

The shift in rate expectations raises the importance of the next several economic reports. Friday’s August employment report will be the main focus this week, with consensus expectations calling for only about 65,000 new nonfarm payrolls following a 23,000 decline in July. The unemployment rate is expected to remain near 4.1%. Investors will then turn quickly to next week’s CPI and PPI reports, which should provide another important input ahead of the Fed’s September meeting.

Meanwhile, Nvidia provided another reminder of the extraordinary growth being generated by the AI infrastructure buildout. The company once again reported results far ahead of expectations, with demand continuing to expand rapidly despite its already enormous scale. Nvidia’s sales are expected to roughly double to more than $400 billion this year, while management’s initial outlook points toward revenue approaching $700 billion next year. The company also indicated that growth could be even stronger if additional supply were available.

The results gave fresh support to an AI trade that has become more volatile as expectations and investment commitments have risen. The near-term demand picture remains exceptionally strong, but the scale of the buildout is also requiring increasingly large amounts of external financing, including more debt and complex partnership structures. At the same time, a growing share of incremental compute demand is being driven by a relatively small number of leading AI developers such as OpenAI and Anthropic. Those dynamics do not take away from the strength of current earnings, but they do reinforce the importance of watching how the economics of the buildout evolve as capital requirements move higher.

Broadcom’s earnings report this week will provide another highly anticipated read on AI chip and networking demand. Beyond corporate earnings, Friday’s jobs report will remain the centerpiece of the economic calendar. Geopolitical risks also remain elevated after the U.S. and Iran exchanged attacks over the weekend for the first time in roughly a month, keeping the Strait of Hormuz and energy markets in focus.

For now, the fundamental earnings backdrop remains supportive but rising interest rates are increasing the hurdle for equity valuations and for the enormous capital commitments supporting the AI buildout. That balance should remain an important influence on markets as investors move into September.

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