The global economy continued to demonstrate remarkable resilience throughout August, successfully absorbing the headwinds of ongoing geopolitical conflict in the Middle East and a persistently hawkish Federal Reserve. Despite the underlying tension of inflated national debt and higher Treasury yields, equity markets powered higher. The S&P 500 reached a new all-time high in early August, and while it slid marginally later in the month, it still finished solidly in positive territory.

Much of this optimism was fueled by a spectacular corporate earnings season and the continuation of the artificial intelligence capital expenditure boom. Massive technology bellwethers delivered quarterly results that far exceeded analyst expectations, propelling major indices upward and proving that corporate America’s fundamentals remain robust even in a tight monetary environment.

Let’s Get Into the Data

• A Softening but Stable Labor Market: July saw a drop in overall employment, signaling a weakening in the labor market. The unemployment rate edged down, though this was primarily driven by a decline in the labor force participation rate to 61.4%—the lowest level since April 2020.
• Inflation Lingers: Inflation trends in August showed progress but remained stubbornly persistent. Headline Consumer Price Index (CPI) rose just 0.1% for the month, putting the annual inflation rate at 3.4%. However, core measures remained above the Fed’s 2.0% target, keeping monetary policy tight.
• GDP & Blockbuster Earnings: The U.S. economy’s expansion slowed to an annualized rate of 1.5% in the second quarter, down from 2.1% in the first quarter. Yet, underlying consumer spending actually accelerated to 3.4%. Meanwhile, corporate profits surged, with the S&P 500 tracking an extraordinary 52.0% earnings growth rate for the second quarter.

What Does the Data Add Up To?

The combination of persistent inflation and a remarkably strong corporate backdrop has forced the Federal Reserve to maintain a firm stance. Following the release of stable core inflation data, the market initially reduced the odds of a September rate hike to about one in three. However, that sentiment shifted dramatically late in the month. At the economic symposium in Jackson Hole, Fed Chair Kevin Warsh expressed distinct concern over lingering inflation. His hawkish tone quickly pushed the market’s implied odds of a September rate increase back up to 60%.

Meanwhile, higher bond yields prompted direct action from the Treasury Department. Treasury Secretary Scott Bessent intervened in the bond market by doubling the buybacks of 10- to 30-year securities in an effort to help lower longer-term borrowing costs. Ultimately, the data paints a picture of a central bank still fiercely battling inflation, while a strong consumer and blowout corporate earnings keep the broader economy expanding.

Number of the Month: 52.0%

Through the second quarter, the reported earnings growth rate for the S&P 500 hit a staggering 52.0%. This marks the highest earnings growth rate reported by the index since the second quarter of 2021. While such robust corporate profits are driving equity markets to new highs, chasing past performance can lead to unbalanced portfolios. At Suttle Crossland Wealth Advisors, we emphasize disciplined, fiduciary planning designed to help keep your asset allocation aligned with your long-term goals, rather than getting swept up in short-term market euphoria.

Market Performance

• Equity Markets in August
  • S&P 500: Overcame inflation concerns to post a 2.62% gain for the month, pushing its year-to-date climb to 12.28%.
  • Dow Jones Industrial Average: Displayed solid strength, returning 1.34% for the month and bringing its year-to-date return to 10.66%.
  • Nasdaq Composite: Led the major indices with a 3.93% advance, driven by investor optimism surrounding AI and strong tech earnings.
• Bond Markets in August
  • 10-Year Treasury Yield: Remained relatively range-bound, closing the month at 4.75% amidst hawkish Fed commentary.
  • Bloomberg U.S. Aggregate Bond Index: Navigated a challenging month defined by rising yields across the curve to post a modest 0.4% return.

Looking Ahead

As we transition into the fall, market focus will be squarely on the Federal Reserve’s upcoming policy meeting, where policymakers will decide whether to follow through on the increased odds of a September rate hike. Investors will also be carefully monitoring the evolving geopolitical situation in the Middle East and its potential impact on global energy markets. Finally, it is worth noting that September has historically been the weakest month for the S&P 500, averaging slightly negative returns over time.

The Smart Investor

With equity markets reaching all-time highs and monetary policy remaining tight, this is an ideal time to stress-test your financial plan. Strong market rallies often cause portfolios to drift from their target allocations, potentially exposing you to more risk than you intended. Now is the perfect window to evaluate how your wealth is positioned, harvest any strategic losses, and evaluate if you are positioned to take advantage of high fixed-income yields in a tax-efficient manner. If you want to review your retirement strategy in light of the current economic environment, contact the fiduciary team at Suttle Crossland Wealth Advisors in Scottsdale today.