Weekly Investment Perspective

U.S. equities finished lower last week as escalating conflict in the Middle East pushed energy prices and Treasury yields higher. The Dow Jones Industrial Average declined 1.6%, the S&P 500 fell 0.8%, the Nasdaq Composite lost 0.7%, and the Russell 2000 dropped 2.4%. WTI crude rose 9.4% and reached its highest level since late May, while the 10-year Treasury yield closed above 4.95% on Friday and touched 5% in early trading Monday. Energy and communication services outperformed, but economically sensitive and rate-sensitive groups, including healthcare, materials, industrials, real estate, software, and small-cap stocks, generally lagged.

Conflict in the Middle East remained the week’s dominant macro risk. Oil prices moved back above $100 per barrel as shipping through the Strait of Hormuz stayed constrained and Houthi activity threatened traffic near the Bab el-Mandeb Strait, another critical trade route. The pressure intensified after a drone attack forced Saudi Arabia to close its East-West pipeline, an alternate route to the Red Sea. A planned meeting between Iran and Gulf Arab states to discuss temporary shipping arrangements through the Strait of Hormuz was subsequently postponed. Together, these developments reduced the prospect of a near-term diplomatic off-ramp and reinforced concerns that a prolonged disruption could keep energy prices elevated.

August consumer inflation came in modestly above expectations, strengthening the case for a quarter-point interest-rate increase at the Federal Reserve’s meeting this week. Headline CPI rose 0.4% month over month and 3.4% year over year. Core CPI increased 0.29% for the month, above the 0.2% consensus estimate, and 2.4% from a year ago, while measures of services inflation also firmed. Markets ended the week assigning an 85% probability to a rate hike. Wednesday’s decision will be an important test for new Chair Kevin Warsh, who must build consensus within a committee showing greater disagreement over the appropriate policy path. The challenge is further complicated by President Trump’s public calls for lower rates, even as higher oil prices add renewed inflation risk.

Although this week’s Fed decision will command attention, the 10-year Treasury yield may ultimately matter more for stocks. The Fed directly sets overnight interest rates, which most heavily influence short-term borrowing costs. Longer-term yields also reflect expectations for inflation, economic growth, and future Fed policy, along with supply and demand for Treasury debt. For stocks, higher long-term yields make bonds more attractive, raise borrowing costs across the economy, and reduce what investors are willing to pay for future corporate earnings. Equities often struggle initially when the Fed begins raising rates: across the past seven hiking cycles, the S&P 500 declined an average of 2% during the first three months, but gained 9% over the next 12 months, according to Goldman Sachs. Strong earnings may again provide a cushion, but a 10-year yield near 5% is likely to matter more for stocks than a single quarter-point rate hike.

A new debate over “pacing the frontier” in artificial intelligence has added to the risk-off tone early this week. Anthropic CEO Dario Amodei called for slowing the development of the most advanced AI models, citing cybersecurity risks and the potential for recursive self-improvement. OpenAI CEO Sam Altman and Elon Musk expressed support for greater caution, while the White House pushed back against measures that could weaken the United States’ competitive position relative to China. The immediate market concern is whether slower model development could reduce demand for AI infrastructure. However, pacing capability growth would not necessarily mean a broad reduction in capital spending, particularly while computing capacity remains constrained. The debate is more likely to increase scrutiny of where AI investment is allocated and which suppliers can demonstrate durable demand.

The Federal Reserve’s policy announcement and updated economic projections on Wednesday will be the week’s primary event. Investors will assess not only whether policymakers raise rates, but also Chair Warsh’s explanation of how the committee is balancing persistent inflation, higher energy costs, and signs of slower activity in parts of the economy. Thursday brings another important round of data, including initial jobless claims, August housing starts, and August pending home sales. These releases should provide a clearer view of labor-market resilience and the impact of mortgage rates above 7% on housing activity. With geopolitical developments, energy prices, and monetary policy all moving quickly, near-term volatility may remain elevated even as the underlying corporate earnings backdrop continues to offer support.

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