U.S. equity markets extended their summer rally last week, supported by healthy corporate earnings, stable Treasury yields, and a relative lull in trade tensions. The S&P 500 rose 0.9% and briefly touched another record high before finishing just shy of that level, while the Nasdaq added 0.8%. Small-cap stocks led the way with the Russell 2000 gaining over 3%, buoyed by rising expectations for a September Fed rate cut. Despite midweek volatility driven by hotter producer inflation data, the broader market tone remained constructive as investors digested a mixed bag of economic signals against a backdrop of resilient earnings.

On the trade front, headlines took a rare back seat. As expected, the White House formally extended its tariff reprieve for Chinese imports by another 90 days, pushing the next decision point into early November. However, comments from President Trump on Friday hinted that long-anticipated tariffs on imported semiconductors could still be unveiled within weeks. In the meantime, negotiations with key trading partners continue, though Treasury Secretary Bessent noted that talks with India remain “particularly challenging.” The relative calm in trade policy last week helped markets refocus attention on inflation and the evolving interest rate outlook.

Inflation data delivered a split message. The July Consumer Price Index (CPI) came in right in line with expectations, with core prices rising at a manageable pace and only limited evidence of pass-through from tariffs—at least for now. But Thursday’s Producer Price Index (PPI) surprised to the upside, led by a jump in services costs. While analysts largely expect the PPI strength to have only a modest effect on the Fed’s preferred inflation gauge (core PCE), the report raised some concern about sticky service-sector inflation.

Despite some areas of concern from last week’s inflation reports, market rate cut expectations held firm. The 2s/10s yield curve steepened to its widest point since May, signaling investor anticipation of Fed easing ahead. Futures markets now assign a roughly 83% probability of a 0.25% cut at the September FOMC meeting, according to CME FedWatch. There has been some speculation about the potential for a larger 0.50% rate cut, but central bank officials have pushed back against such a move with a preference to resume rate cuts at a moderate pace when they are ready.

Consumer data offered a mixed read on household health. July retail sales rose modestly, and June figures were revised higher, reflecting continued consumer resilience. But sentiment surveys told a more cautious story. The preliminary August University of Michigan consumer sentiment index posted its first decline in four months, and both short- and long-term inflation expectations ticked higher. Consumers appear increasingly wary about the persistence of inflation and the potential for policy missteps, even as their actual spending behavior remains steady.

Corporate earnings helped underpin market optimism. With over 90% of S&P 500 constituents now having reported, Q2 results are tracking well ahead of expectations. Roughly 80% of companies beat EPS estimates, with an average upside surprise of 8.4%. While many management teams have acknowledged macro headwinds and tariff uncertainty, forward guidance has held up reasonably well.

Looking ahead, the coming week will feature several key data releases, including housing starts, building permits, jobless claims, and August PMI surveys. But the main event will be Friday’s Jackson Hole Economic Symposium, where Fed Chair Jerome Powell is scheduled to deliver a closely watched address. Markets will be looking for any clues on the direction and urgency of policy easing as the Fed weighs an increasingly complex mix of softening growth, persistent inflation, and elevated geopolitical risk. In addition, retail earnings will shed more light on the health of the U.S. consumer with results from Walmart, Target, Home Depot, Lowe’s, and TJ Maxx.

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