Weekly Investment Perspective

U.S. stocks declined last week as investors weighed rising long-term interest rates, weakness in technology shares, and higher oil prices. The Dow Jones Industrial Average fell 0.85%, the S&P 500 declined 1.43%, and the Nasdaq Composite dropped 2.05%. The pullback ended three consecutive weeks of gains for the S&P 500 and Nasdaq, although a Friday rebound helped the indexes finish above their weekly lows. The fundamental backdrop has remained very supportive, with S&P 500 earnings now projected to grow roughly 30% in 2026 as the second quarter earnings season winds down. However, investors are also applying a higher standard amid rising borrowing costs and the growing role of debt in financing the AI infrastructure boom.

Technology was the primary source of weakness. The information technology sector fell approximately 3.2%, while semiconductor stocks declined about 5.5%. Meta dropped 6.8% and Nvidia declined 4.6% as higher interest rates, elevated valuations, and concerns about the financing of artificial-intelligence infrastructure weighed on sentiment. The concern is not that AI demand has weakened, but that spending is rising faster than the internal cash flow available to fund it. Investors increasingly want evidence that the eventual returns will justify the amount of capital being committed, particularly as companies rely more heavily on borrowed money.

Long-term Treasury yields were another important driver of last week’s performance. The 10-year yield ended near 4.70%, while the 30-year reached its highest level since 2007. The Treasury Department announced that it would at least double the cap on purchases of older, less-liquid securities in the 10- to 30-year range, from $2 billion to at least $4 billion per operation beginning September 9. The announcement initially pushed bond prices higher and yields lower, but much of the move later reversed. By Monday, reports that Treasury may draw on its nearly $950 billion cash balance suggested the effort could expand further. The Treasury Department describes the program as a measure to improve market liquidity, but the surprise expansion shows that officials are increasingly uncomfortable with the rise in long-term borrowing costs. The purchases do not change the government’s underlying borrowing needs, and they arrive as companies are also issuing more debt to finance the AI buildout. For equity investors, higher yields make it harder for the returns on that spending to justify the amount invested.

Higher oil prices reinforced the bond market’s inflation concerns. West Texas Intermediate crude oil gained approximately 5.7% as the U.S.-Iran conflict continued to affect shipping and raise concerns about global energy supplies. On Monday, Treasury Secretary Scott Bessent described the next round of sanctions as an “economic D-Day” intended to isolate Iran from its remaining trade partners. The key market question is whether the U.S. is willing to pressure China, which buys most of Iran’s oil; without that step, the effect on global supply may be limited. If the sanctions materially reduce Iranian exports, higher fuel prices would pressure consumers and make the Fed’s recent inflation improvement harder to trust.

Minutes from the Fed’s July meeting showed that officials remain focused on inflation risks from tariffs, energy prices, and AI-related investment. Several participants favored a quarter-point rate increase, and three ultimately dissented, but most preferred to wait for more information. Since the meeting, July CPI rose just 0.1% month over month and payrolls declined by 23,000, reducing the urgency to act even as layoffs remain limited and the broader economy continues to expand. The minutes suggested that July’s decision reflected a desire for more evidence, not a conclusion that the inflation problem had been resolved. Most officials expected inflation to moderate but judged the risks to be skewed to the upside. Some business contacts were absorbing higher input costs through lower margins, while others reported that consumers would resist further price increases. Recent readings argue for patience in September, but another sustained rise in oil prices could quickly reopen the debate.

Nvidia’s results Wednesday will provide a direct test of how high investor expectations for the AI buildout have become. A strong quarter is widely expected, so attention will center less on current chip demand and more on whether customers can continue funding increasingly large data-center projects and whether those investments are beginning to produce sufficient returns. Wednesday’s PCE inflation and GDP reports and Chair Kevin Warsh’s Friday remarks at Jackson Hole will help determine whether interest rates add to or relieve that pressure.

The earnings backdrop remains constructive, but the market is becoming less willing to reward spending without clearer evidence of return. That favors companies able to fund growth internally and reinforces the value of maintaining portfolio exposure outside the AI capital-spending cycle.

2026 The Long View | First Merchants Bank