The Week Ahead - 8/16/26

US economic data remains on the lighter side (in terms of importance) next week with highlights July industrial production (our most comprehensive look at manufacturing), housing starts/permits, import prices, and the August flash PMIs. We’ll also get July pending existing home sales and August NAHB home builder sentiment along with the normal weekly reports (ADP, unemployment claims, etc.).

In terms of Fed speakers interestingly none on the schedule, but we will get the minutes from the July meeting which will be parsed with much interest.

US Treasury auctions are light with just the lightly followed 20-year Wednesday and a 30-year TIPS reopening Thursday.

In terms of SPX Q2 earnings we’re very much in the wind-down phase (at least until the end of the month with Nvidia) with just 12 SPX components reporting Friday. There’s a retail focus to the over $100B reporting bunch which includes WMT, HD, ADI, TJX, DE, LOW (by earnings weight). Ex-US we’ll get BABA and BIDU among others.

In terms of Iran, as I said three weeks ago:

things remain very fluid. After two weeks of escalation, things seem to have de-escalated over the weekend. The Iranians know he needs to bring this to a close, but how far they want to push things, I’m not sure.

And last week

Axios reporting that President Trump has decided against escalating things militarily (taking into consideration he has in the past made such statements just before an escalation)… So it appears for now things will drag on with little change through the mid-terms unless/until Iran decides they want to reopen the Strait. It does appear that the administration has intentions to try to put more economic pressure on as noted in the Friday morning update.

So as I said now ten weeks ago, “we’ll just have to see how things progress”. While odds on Kalshi that traffic through the Strait would normalize by the end of the year had risen as high as 86% June 24th, that has dropped to new lows in August currently at just 34%.

Ex-US highlights from DB:

Investors will get a read on global growth on Friday when the flash August PMIs are due for economies including the US, UK, Germany, France and Japan.

In Europe, central bank highlights feature the Riksbank decision on Thursday and the ECB’s July consumer expectations survey due Friday. The UK will dominate the important European data releases. The focus will be on July inflation on Wednesday, where our UK economists expect headline inflation at 2.92% YoY and core CPI at 2.54%, with services inflation declining to 3.42% and food inflation at 1.49%. There will also be labour market data on Tuesday and, on Friday, retail sales and the August GfK consumer confidence index.

Elsewhere in the region, economic indicators due feature the ZEW survey in Germany on Tuesday and Q2 GDP in Denmark on Thursday.

Key economic data is also due in Japan, including Q2 GDP on Monday and the national CPI on Friday. For the former, our Chief Japan economist expects real GDP to grow at +1.6% QoQ and for the CPI he forecasts core CPI ex. fresh food to rise to 1.8% YoY from 1.6% in June and core-core inflation ex. fresh food and energy to increase to 1.8% (1.7%).

In China, the focus will be on July activity data, including retail sales and industrial production, due Monday. Our economists forecast industrial production growth to ease by 0.4ppt to 4.9% YoY and retail sales growth to soften further to 0.9% YoY from 1.0% in June. See more here.

Rounding out with corporate earnings, the spotlight ex-US will be Alibaba and Baidu in China.

Here’s their one-pager:

Monday August 17

Data: US August Empire manufacturing index, NAHB housing market index, June total net TIC flows, China July retail sales, industrial production, home prices, investment, Japan Q2 GDP, June capacity utilisation, Canada June international securities transactions, July CPI

Central banks: ECB's Lane speaks

Earnings: BHP

Tuesday August 18

Data: US August New York Fed services business activity, July industrial production, import price index, export price index, housing starts, building permits, capacity utilisation, pending home sales, UK June average weekly earnings, unemployment rate, July jobless claims change, Germany August Zew survey, Eurozone August Zew survey, Canada July existing home sales, housing starts

Central banks: ECB's Lane speaks

Earnings: Home Depot, Baidu

Wednesday August 19

Data: UK July CPI, RPI, PPI, June house price index, Japan June core machine orders, Italy June current account balance, ECB June current account, Eurozone Q2 labour costs

Central banks: FOMC minutes, ECB's Lagarde speaks

Earnings: Analog Devices, TJX, Target, Lowe's, Estee Lauder

Auctions: US 20-yr Bonds ($16bn)

Thursday August 20

Data: US August Philadelphia Fed business outlook, July leading index, initial jobless claims, China 1-yr and 5-yr loan prime rates, Japan July trade balance, Germany July PPI, Eurozone June construction output, Canada July industrial product price index, raw materials price index, Australia July labour force survey, Denmark Q2 GDP

Central banks: Riksbank decision, ECB's Sleijpen speaks

Earnings: Walmart, Deere, Alibaba

Auctions: US 30-yr TIPS (reopening, $8bn)

Friday August 21

Data: US, UK, Japan, Germany, France and Eurozone August PMIs, UK August GfK consumer confidence, July public finances, retail sales, Japan July national CPI, France August business confidence, ECB July consumer expectations survey, Eurozone August consumer confidence, Canada June retail sales

In this week’s Week Ahead

• An update on the economy, including last week’s mixed data, the Citi Economic Surprise Index, the latest Q3 GDP trackers, the Dallas Fed Weekly Economic Index, Goldman’s Current Activity Indicator, BoA card spending, and financial conditions.
• A closer look at the consumer backdrop, including BoA’s card-spending acceleration, the reopening of BoA’s “K” between higher- and lower-income spending, the continued strength in electronics and goods spending, JPM’s Mike Feroli on retail sales, consumer spending, Prime Day distortions, and consumer credit quality, and Redbook sales.
• A Q2 earnings season update, including the latest FactSet earnings framework, beat rates, the magnitude of earnings and revenue surprises, Amazon and Alphabet’s impact on headline earnings growth, sector-level expectations, record margin estimates, and market reactions to beats and misses.
• A look at earnings beyond Q2, including Q3, 2026, and 2027 earnings expectations, BofA on AI vs. non-AI earnings growth, Goldman on AI infrastructure earnings, enterprise AI spending, AI adoption, and whether productivity benefits are showing up in earnings.
• An update on earnings breadth, including Jim Paulsen on the number of S&P 500 companies seeing higher 12-month forward EPS estimates and how that compares with the 2023 earnings rebound and why the current breadth may be healthier than the exceptional peaks in 2018 and 2020.
• A look at valuations, including the latest forward P/Es for the Mag-7, large caps, mid caps, and small caps, along with Bloomberg’s Jonathan Levin on the valuation setup.
• A breadth update, including the McClellan Summation Index, stocks above 20- and 200-DMAs, new highs minus new lows, equal-weight vs. cap-weight, small caps vs. large caps, growth vs. value, and the continued rise in growth/value forward earnings.
• A detailed positioning and flows section, including Deutsche Bank’s composite positioning work, including discretionary vs systematic positioning, large-cap positioning, mega-cap growth and large-cap Tech positioning, Goldman’s prime-book flows and hedge fund leverage, BoA’s systematic flow estimates, CTAs, vol-control funds, and risk parity.
• An update on options and leveraged ETF positioning, including Deutsche Bank on call/put volume and skew, BoA on SPX, Nasdaq-100, and single-stock leveraged ETF positioning.
• A look at retail positioning and activity, including Citadel’s Rubner on the return of retail participation, cash-equity buying, options hedging, and broad-based ETF option activity, BoA record private-client equity allocations, and Tier1Alpha on the ongoing 401(k) bid.
• An update on gamma and buybacks, including BoA and Tier1Alpha on dealer gamma, positive-gamma conditions, the cushion before gamma turns negative, Citadel’s buyback-window work, BoA client buyback trends, Goldman on hyperscaler buybacks, and Goldman on equity issuance versus corporate equity demand.
• A sentiment check, including AAII, Investors Intelligence, Goldman’s US Equity Sentiment Indicator, CNN Fear & Greed, BoA’s Bull & Bear Indicator, Helene Meisler’s weekend poll, and Citi’s Panic/Euphoria model.
• A seasonality update, including the second half of August, midterm-year seasonality, and how this year continues to track versus the average midterm year.
• An update on interest rates and Fed expectations, including the impact of CPI, PPI, and retail sales on September hike odds, BofA’s more caveated three-hike call, Ed Yardeni’s view, curve steepening, BofA on CTA positioning at the front end and back end, the MOVE index, term premium, Nomura’s Jon Cohn on AI-related duration supply and “reverse crowding out,” and the Fed-favored 5-year, 5-year forward inflation rate.
• A wrap-up with some thoughts on the market setup, the possibility of a lower-volume summer drift, improving seasonality, earnings, positioning, buybacks, rates, Iran, and why the constructive view still carries into the coming week.

Please note that I do sometimes add to or tweak items after first publishing, so it’s usually safest to read it from the website where it will have any updates.

Economy

Looking first at the economy, my intro has remained the same since the start of the Iran conflict: “we continue to see it weathering the various storms remarkably well due in large part to continued resilient consumption (fueled by huge increases in wealth over the past few years despite slowing incomes) and AI-spending… with data of late showing a stable (and perhaps accelerating) economy, but one that is also boosting inflation.”

As noted previously, while in June that “perhaps accelerating economy” parenthetical did a lot of work, things tailed off in July, and I noted last week “as we start August, the data has been mixed,” and last week was overall relatively weak although with some important caveats.

Most importantly, the big drop in July retail sales is explained in large part by the move in Prime Day to June which was a "double hit" to the July retail sales figure as not only did July lose the sales to June, but the seasonals expected it to be in July not June, so there was also a seasonal adjustment which effectively doubled the month-to-month compare. In addition, the months coming into July were very strong so some give-back was not unexpected. In that regard, JPM’s Feroli notes:

“we continue to look for real consumer spending to expand at a 1.75% pace this quarter, a moderation from last quarter’s 3.2% outcome but still close to trend.

In addition to the Prime Day distortion, “the July slip came after a very strong run for retail spending, and the three-month average annualized gain in ‘control’ sales through July is still a quite strong 5.6% [and 12-month is 4.6% (chart)].

“Finally, while we only have just over a week of data, the Chase card data—which has the hot hand—is pointing to a rebound in spending in August.

“Nor do we see significant signs of stress in consumer credit quality. This week the NY Fed released its quarterly survey of household debt and credit. Total household debt decreased slightly last quarter, and transitions into early delinquencies were largely steady. The stock of credit over 90 days past due remains quite elevated by historical standards, but in a helpful blog post NY Fed economists discuss how this is largely an artifact of changes in credit bureau reporting practices.”

Another weak report was July existing home sales, but those are not particularly economically impactful (although they do help with mortgage demand and broker’s fees and often come with refurbishing outlays). The low hire-low fire economy remained in effect with another deceleration in the ADP weekly job growth figure as unemployment claims remained historically low, while UMich consumer sentiment fell back on inflation concerns.

So no reason to change my outlook at this point. The economy was pretty strong in the first half, so some giveback in July is, if anything, a yellow light at this point. We’ll need at least another month of similar data before I even start to raise my recession concern levels.

Otherwise, the data was focused on inflation which was constructive as discussed in the CPI and PPI reports although both with their fair share of caveats as well.

But the weak data last week paired with the cool PPI print (remembering that cool inflation prints are a “miss”) saw the Citi economic surprise index drop to 15.1, the least since the start of May, from 29.5, 38.3, and 57.1 the prior three weeks.

Meanwhile GDP estimates are for now consistent with a solid economy (remembering GDP going into recessions generally doesn’t look like one is coming (it was up around 2% in Q2 & Q3 2008 well after the recession had started)).

BoA (who has been the most accurate over the past year) has not released their Q3 esitmate yet but their official estimate is 2.5%. Goldman +2.2% (from +2.7%) JPM +2.5% (+2.5%) Morgan Stanley +2.7% Atlanta Fed +4.31% (from +5.83% remembering they have been very high to start the last two quarters as well) NY Fed +2.14% (+2.24%) St Louis Fed +2.41% Avg = +2.68% (from +2.97% without MS or St. Louis) Median = +2.50% (from +2.46%)

And as you know if you’re a regular reader, one of my favorite GDP trackers is the Weekly Economic Index from the Dallas Fed.*

In the week through Aug 8th (so doesn’t have last week’s data) it was little changed at +2.70% from +2.71% the prior week.

More importantly, the 13-wk avg remained at 2.83%, just under the 2.87% three weeks ago which was the best since 2022, continuing to evidence economic momentum that is above trend.

*The WEI is scaled as a y/y rise for real GDP (so different than most GDP trackers which are Q/Q SAAR) and uses 10 daily and weekly economic series but runs a week behind other GDP trackers.

It has over time had one of the highest correlations with actual GDP of any tracker (see chart) although for Q2 it came in high predicting +2.80% y/y GDP growth vs the actual first estimate of +2.10%, while for Q1 it predicted +2.48 vs 2.66%. More importantly, it has consistently indicated no recession and relatively healthy growth since the pandemic (which is what we’ve experienced).

And Goldman’s July US Current Activity Indicator* remained at 3.6%, the best since November 2021. That comes after the strongest six-month period since 2022, as the manufacturing component is getting more help from other sectors, although still represents 2.0% of that 3.6% reading.

*The CAI is their “real-time measure of inflation-adjusted economic momentum using 37 inputs.”

BofA card spending (credit+debit) accelerated for a third week in the week ending August 8th, with the gains continuing to broaden:

• Total +6.2% y/y (+4.6% four-week moving average)
• Ex-gasoline +5.4% (+3.9% four-week moving average), while
• Ex-autos and gasoline +5.6% (+4.5% four-week moving average).

Gasoline moved to +20.0% y/y (from +19.1%) with pump prices remaining elevated from a year earlier.

The week’s standout mover on a percentage basis though was electronics, which reaccelerated to +21.8% from +17.3% — a 4.5-point jump that returned it to the top of the board, comfortably above its +20.2% four-week average.

But the gains went beyond those two categories and BofA noted that many categories saw sizable increases in y/y spending growth versus the prior week, and framed the three-week rebound as consistent with its view that the mid-July slump was just a blip. On the income split, BofA flagged that its “K” reopened somewhat this week, with higher-income households seeing stronger ex-gas gains than lower-income ones, after the two had converged the prior week.

Looking at the rest, general merchandise jumped to +6.9% y/y from +3.9%, and department stores extended their recovery to +2.8% from -1.5%, moving back above their +0.1% four-week average.

Not every category kept pace, however. Restaurants & bars slipped to +2.9% y/y from +3.4% and transit eased to +8.2% from +8.8%, though both remained clearly positive. Furniture (+2.1%) and home improvement (+0.9%) each firmed and stayed in positive territory.

Grocery was the only category negative y/y, at -0.6%.

And we also saw Redbook sales remain firm the week of August 7th:

Redbook same-store retail sales rose 8.3% y/y in the week ending August 7th. Sales growth remains well above the 2025 average of 5.8% y/y.

And financial conditions remain accommodative with Bloomberg's U.S. Financial Conditions Index the most accommodative since the 1990s.

While Goldman is not quite there with their index, it does similarly remain around the most accommodative since 1990, at these levels only a handful of times (and outside of the pandemic only 1999-2000 spent this long at this level).

With almost all of the loosening over the past year due to equities offsetting tightening from rates and credit spreads.

Earnings

Note: Factset is off until August 28th, so I have left in their last update until then (which will capture Nvidia earnings that week). Old stuff as always in italics, new stuff that I will continue to intersperse is not.

Through August 6th according to Factset we’ve had 88% of SPX components report by earnings weight, so we’re getting to the point where we can start to lock in the overall results, and while we came into the earnings season with a high bar the results cleared it, with 86% beating, slightly above the 84% beat rate in Q1 (which was the best since Q2 ‘21) and vs the 5yr average of 78% and the 10yr average of 76%.

And despite the high bar the magnitude of the beats has been a huge +29.2% (down around 5pps though the past two weeks), almost double Q1’s +16.6%, and over four times the +6.5% in Q4 and +6.6% in Q3, and vs the 10-yr average of 7.4% and the 5-yr average of 7.0%, led by Consumer Discretionary’s +100.4% (boosted by Amazon’s massive 215% beat (on the back of a $53.4 billion gain in investments (primarily Anthropic) as well as Nike’s +479% beat, followed by Comm Services (+102.3%) similarly boosted by Alphabet’s +217% beat on the back of a $98 billion gain tied to its own investments.

Factset notes excluding Amazon and Alphabet, the surprise percentage for the S&P 500 for Q2 2026 would fall to 10.9% which would still be materially above the 5 and 10-year averages.

The beats have boosted Q2 earnings expectations to an eye-watering +50.4% up from 18.8% at the start of the quarter (April 1st). That would be the seventh consecutive quarter of double-digit earnings growth (and second above 20%) and the strongest since Q2 2021 (91.6%).

Factset notes if Alphabet and Amazon.com were excluded, “the blended earnings growth rate for the S&P 500 for Q2 2026 would fall to [a still phenomenal] 32.0% from 50.4%,” the “2nd consecutive quarter of year-over-year earnings growth above 20% and 7th consecutive quarter of double-digit earnings growth.”

Energy continues to lead on a percentage growth basis (although less so on an earnings weighted basis) +147.0%, Comm Services is not far behind (+117.0%) and Consumer Discretionary is +91.6%. Tech is +70.4%. Just incredible numbers.

As with Q1 Health Care is expected to be the only sector with negative growth -6.7% (down from +6.7% on March 31st but up from -14.0% the prior week).

In terms of Q2 revenues, 76% of SPX components have beat (vs the 10-year average of 68% and 5-year average of 70%). The beats are 3.2% above estimates, which would be the best since Q2 2022 (3.2%) and above the 5-year average of 1.9% and the 10-year average of 1.6%.

That has boosted Q2 revenue expectations to +15.0% (up from 9.5% at the start of the quarter (Apr 1st)) led by Energy (+42.5%, up from 31.7% the prior week), Tech (+35.6%), and Comm Services (+15.3%). No sector is expected to see a revenue decline y/y, in fact the least is +5.0% (Utilities).

If 15.0% is the actual revenue growth rate for the quarter, it will mark the highest revenue growth rate reported by the index since Q4 2021 (16.1%). It will also mark the second consecutive quarter of double-digit revenue growth for the index.

Looking ahead, “analysts expect lower revenue growth for the S&P 500 for the 2nd half of 2026. For Q3 2026 and Q4 2026, the estimated revenue growth rates for the index are 11.3%, and 10.9%, respectively,” meaning we’re expected to continue to see double-digit growth.

Profit margins were also boosted further this week and are now forecast at 16.9%, easily a new record (beating the 14.8% in Q1). They are also well above the prior year’s 12.9% and the 5-year average of 12.3%.

Again, this saw a big boost from the non-cash earnings in Amazon and Alphabet, but even removing those it only falls to 15.0%, still a record.

Apollo's Slok:

The S&P 493 is spending heavily on AI. But it is not showing up in profit margins.

The bottom line is that the AI capex boom is so far only showing up in the sellers' margins, not the buyers.

This is important because the longer it takes the S&P 493 to generate ROI, the bigger the downside risks to an economy and a market this concentrated in the AI trade.

BofA similarly notes an “exceptionally strong earnings season” although more so for “AI stocks”:

Earnings growth was broad in 2Q, with 10 of 11 sectors and 81% of stocks on pace to post positive YoY growth, a 94th percentile quarter over the past 20+ years (Exhibit 7). Even so, AI remained the index’s primary growth engine: the median AI-related stock grew 28% YoY, compared with 12% for the median non-AI stock. While those growth rates were unchanged from 1Q, consensus expects a sharper deceleration among AI stocks next quarter, with median EPS growth moderating by 12ppt to 16% vs. a 4ppt decline to 8% for non-AI stocks (“AI stocks” defined by membership in various AI-related ETFs; Exhibit 8).

And Goldman this week has this:

The Q2 earnings season delivered stellar results, with stocks involved in the AI infrastructure build-out continuing to boost S&P 500 profit growth. S&P 500 EPS growth in Q2 2026 is tracking at 31% year/year excluding the “other income“ related to some private investment stakes. Earnings for the hyperscalers and the AI infrastructure companies benefiting from their capex spending increased by 54% year/year in Q2, accounting for about 50% of S&P 500 EPS growth during the quarter. However, earnings growth for the rest of the market has also been strong and accelerating. Excluding the Energy sector profits that were boosted by higher oil prices, the rest of the S&P 500 posted year/year EPS growth of 14%.

Despite the widespread strength of corporate profit growth, the impact of AI adoption on earnings still appears narrow. Our economists have noted that academic studies and company anecdotes show a 20-30% uplift in labor productivity in the limited areas where generative AI has been deployed, and they find that industries with higher AI adoption rates are showing a slight acceleration in productivity growth over the past year in official US data. During the Q2 earnings season, 11% of S&P 500 companies quantified the impact of AI productivity on a specific use case, such as coding or customer support, and 2% quantified the impact of AI productivity on earnings. Both of these were similar to the shares in Q1 2026. Earnings results showed a modest and statistically insignificant difference in earnings growth between the companies quantifying AI productivity gains this quarter and other S&P 500 companies.

However, the recent acceleration in enterprise spending on AI suggests that the impact of corporate AI adoption should become increasingly clear in coming quarters. The Ramp AI Index shows that the monthly AI spend per employee for the median company has increased from $5 at the start of the year to $12 in July. The distribution of corporate AI spend is wide, with the top decile company spending $650 per month per employee in July (vs. $240 at the start of the year). This pattern mirrors the acceleration in the revenues of AI model providers this year. During the Q2 earnings season, roughly 7% of S&P 500 companies discussed the expenses associated with implementing AI. While there was some evidence that AI impacted corporate expenses in Q2, most companies also noted that these costs remain relatively small, that managements are taking a disciplined approach to AI spend, and/or that the benefits of AI use are outweighing the costs.

And at this point analysts are expecting a third consecutive quarter of 20%+ y/y earnings growth with the Q3 estimate at +27.4%. As in Q2, Energy is expected to lead at 94.3% y/y growth, followed by Tech +59.5%, Comm Services +49.9%, and Materials +31.9%.

Unlike Q2 no sector is expected to have negative y/y growth with Financials the least at +3.4%.

Those rising expectations have seen 2026 SPX earnings growth expectations also continue to ratchet higher now at +30.0%, up from +17.1% March 31st and over double the +14.8% at the start of the year.

As in 2025, Tech is a leader with y/y earnings growth of +49.7% (up from +28.6% at the start of the year) but Energy will exceed that (on a percentage basis) at +76.8% (up from +6.4% at the start of the year) and now so will Comm Services +54.4%, along with Materials (+37.3%) representing the four sectors expected to come in above the SPX average.

And 2027 earnings are expected to be up another +13.6%, which is down though from +17.5% three weeks ago as analysts are no longer carrying over all (but still most of) the boosts in 2026 (such as the investment gains by some hyperscalers) to next year. That’s also down from +16.5% at the start of the second quarter (Apr 1st). Still it’s a double digit advance on top of what is expected to be a 30% gain in 2026. That would also represent a fourth straight year of double-digit earnings growth for the S&P 500, fairly unprecedented.

2027 is expected to be led again by Tech (+33.2%, up from 24.6% at the start of the second quarter despite the huge increase in 2026 estimates) followed by Health Care (+22.1%) which is expected to see a big turnaround after lagging in 2026.

In terms of the note at the start on investment gains not continuing, Comm Services (-10.3% from +8.1% at the start of the quarter) and Consumer Discretionary (-0.1% from +13.9% at the start of the quarter) have joined Energy (-11.4%) as the sectors expected to see negative growth next year.

And earnings expectations continue to be supported by very strong earnings revisions which moved higher for a fourth week in the week of August 7th, after cooling off for two weeks following ten straight weeks of well above average revisions. Overall it marks the best 16 weeks since 2021.

As a result, the 20-week moving average has lifted to the best since 2021 as well, as 12-month out EPS estimates continue to rise to new highs, as they’ve done each week since the turn of the year.

And BofA finds “There have been 2.3x more above-consensus than below-consensus EPS guides since July 1st, far better than historical norms (see Exhibit 15) and at the best level since 2021. By sector, Tech continues to see the strongest guidance trends.”

And while a handful of stocks account for a disproportionate share of the improvement in the S&P 500’s aggregate 1-year forward EPS estimate, the underlying breadth of earnings revisions is actually the best since the 2023 rebound from the 2022–23 earnings recession according to Jim Paulsen via the Daily Chartbook nightly email.

Today, 122 S&P 500 companies have a higher trailing 4-week average 12-month forward EPS estimate — a notable improvement from the much narrower revision breadth seen over the past couple of years.

While that remains below the extraordinary peaks of roughly 150 companies in 2018 and 163 in 2020, that may be a good thing?

Neither was a normal earnings cycle. The 2018 surge followed the 2017 tax reform, which caused analysts to simultaneously reset earnings estimates higher across much of corporate America. The 2020 surge came as estimates violently rebounded from the pandemic collapse amid reopening and extraordinary policy support.

Those were exceptional — and ultimately unsustainable — levels of earnings momentum. At 122 companies, the breadth looks more like the healthy 2023 earnings recovery.

30. Narrow earnings momentum. "The number of S&P 500 firms with higher trailing 4-week average 12-month forward EPS estimates is only about 122 compared to peak levels during early 2018 of almost 150 and during 2020 of almost 163."

In looking at how markets are rewarding beats and punishing misses, according to Factset (who looks from the two days before to two days after a report) in line with the high bar coming into earnings beats are being rewarded well under the typical amount, although improving to +0.4% from the prior week’s +0.1% and -0.3% the week before that (but as compared though to the 5-yr average of +1.0%, and down from +1.2% in 1Q and 4Q ‘25 and +0.4% in 3Q and 2Q ‘25).

Misses though are now being punished less than average at -2.3% vs the 5-yr avg of -3.0% and also better than the -4.3% in 1Q. Previous to that we saw -1.4% in 4Q, -5.0% in 3Q, and -5.5% in 2Q (the last of which BoA said was the worst negative reaction since 2000).

BofA for their part, like Goldman last week, notes that Tech is pulling down the aggregate numbers, and they say looking just one day post-earnings misses have been hit more than usual, especially if accompanied by a guide-down:

"Companies that beat EPS outperformed by just 10bp on average the next day, down from +50bp [the previous week]. Those that beat both EPS and sales gained 90bp, still well below the 1.4ppt historical avg.

"Even with positive reactions to Microsoft and Amazon, the avg. TMT stock that beat both metrics lagged after reporting."

Meanwhile, misses have been punished more than usual (-3.2ppt vs. -2.5ppt historical avg.), while below-consensus EPS guides – which have been relatively rare this quarter – have faced an even steeper penalty (-4ppt the next day).

This week they updated their aggregate numbers:

Companies that beat EPS traded in line with the market the next day on average, while those that beat both EPS and sales gained 80bp, well below the 1.4ppt historical average. Meanwhile, misses have been punished more than usual (-3.4ppt the next day vs. -2.5ppt historical avg.).

Analysts also collectively continue to think that the S&P 500 has a lot of upside, and after falling for the first time in a few months the prior week, FactSet’s compilation of analyst bottom-up SPX price targets moved back higher w/w to 9,106 (+56 pts w/w, ~+1,990 pts since Thanksgiving, ~+2,940 pts since July 1st, and ~815 just since March 31st). That would be +18.1% from Thursday’s close.

Tech (+23.4% from +29.3% the prior week) rose to the sector seen with the biggest upside, followed by Comm Services (+22.1% from +29.9%), but then Utilities (+18.6% from +15.6%) replaces Consumer Discretionary (+17.4% from +25.4%) in third place. On the other side Financials (+9.4% from +10.4%) remains the sector with the least upside, the only sector not expected to see double digit upside over the next 12 months.

As FactSet reminded us in December, the last 20 yrs (through 2024) analysts have been on avg +5.9% too high from where they start the year (which was 8,000 for 2026) but note they underestimated it five of the past six years (including 2025 when they saw 6,755 at the start of the year (we ended at 6,845)).

Over the previous 20 years (2005–2024), the average difference between the bottom-up target price estimate at the beginning of the year (December 31) and the final price for the index for that same year has been 5.9%. In other words, industry analysts on average have overestimated the final price of the index by about 5.9% one year in advance during the previous 20 years. Analysts overestimated the final value (the final value finished below the estimate) in 11 of the 20 years and underestimated the final value (the final value finished above the estimate) in the other 9 years. It is interesting to note that analysts have underestimated the final value in five of the past six years (2019–2024).

In terms of analyst ratings, buy and hold ratings continue to dominate with buy ratings at 59.2% seven tenths below the record high of 59.9% the last week of April. The 5-year month-end average though is 55.8% according to FactSet, so we’re well above that.

Hold ratings are at 36.0%, off the 35.4% record low (to 2009), but well below the 5-year month-end average of 38.7%, with sell ratings at 4.8%, remaining in their narrow range since 2009 but below the 5-year month end average of 5.6%.

Tech leads in buy ratings (69%) while Staples leads in sell ratings (8%).

The mixed results in stock prices over the past week saw valuations (price to next-twelve-month (NTM) earnings) little changed.

And interestingly BBG's Jonathan Levin notes:

"Forward price-earnings multiples are still on the high side of history, but they’re now lower than they’ve been during three-quarters of the breakouts we’ve experienced in the past five years. If you liked stocks at 23 times earnings in late 2025, presumably you love them now!"

Breadth

Breadth, which softened in the second half of July made more incremental improvement last week.

The McClellan Summation Index (“what the average stock is doing”) continues to try to roll upward.

Percentage of stocks over 200-DMAs (red lines) are the highest since March and January on the NYSE and Nasdaq respectively.

While SPX percent of components above their 200-DMAs was unchanged this week just over the downtrend line from 2021 and the highest since 2024.

But shorter-term 20-DMAs see the NYSE remain at the top of its range over the past few months while the Nasdaq is the best since April.

SPX new 52-week highs minus new lows slightly improved but still ended the week at just 16 (vs eight the prior week), but the 10-DMA (blue line) remains near the lowest since April, both though showing limited new-high participation despite the index remaining near its all-time high.

While the ratio of the equal-weight SPX to the cap-weighted edged higher after falling for three weeks.

As did the ratio of small caps to large caps (Russell 2000 to SPX) after hitting the highest since July 2024 four weeks ago.

While S&P 500 growth/value edged back to 2.44 still up from 2.35 three weeks ago, which was the least since early May, but also still down from its all-time high of 2.52 hit at the end of May.

Supported by the ratio of forward earnings for growth/value pushing to a new all-time high at 2.08.

Positioning/Flows

Turning to equity market positioning, after dropping back in July, positioning has continued to rebuild.

Deutsche Bank:

Our measure of aggregate equity positioning was largely flat this week and remained modestly overweight at 0.25 standard deviations, the 58th percentile.

Discretionary investor positioning slipped slightly below neutral, to -0.03 standard deviations and the 44th percentile, while systematic-strategy positioning increased and remained overweight at 0.60 standard deviations, the 76th percentile.

Discretionary positioning remains well below levels implied by earnings growth.

Large-cap positioning was reduced but still overweight at 0.55 standard deviations, the 83rd percentile. Positioning in mega-cap growth and large-cap technology declined notably from previously extended levels, though it remained overweight at 0.68 standard deviations, the 74th percentile. Small-cap positioning stayed close to neutral at -0.03 standard deviations, the 48th percentile.

Goldman for their part says their prime desk saw hedge funds buying US equities “every day this week and at the second fastest pace in the past year, driven by long buys in Single Stocks and to a lesser extent short covers.” That said “trading volumes and institutional activity remain anemic entering the heart of August.”

In that regard, they also note that implied volatility of individual stocks “has fallen sharply” (first chart) which has further pushed down index volatility (second chart, post) and dispersion (third chart).

“Short-dated SPX realized vol remains pinned near the floor, supported by heavy dealer gamma, limited macro volatility and persistent intraday mean reversion.”

Hedge fund positioning remains light though with gross leverage at just the 4th percentile over the past year (although 50th over the past 3 years), despite the buying the long-short ratio fell to the 66th 1-year percentile (36th 3-year).

BoA for its part (note these are global flows) sees overall systematic positioning as having relevered to the highest since March. That has reduced the upside (although they are still biased to buy in the upcoming week) and increased the potential downside but importantly they continue to see “sell triggers… relatively distant, with declines of more than 4% generally required to generate meaningful CTA selling across the indices we track.”

Specifically they see:

• +$19B of buying in a flat market (from +$33B of buying two weeks ago);
• +$11B of buying in an “up” market (from +$19B; ”up market” defined as 97.5th percentile price path or ~+3.5% similar to Goldman); and
• -$96B of selling in a “down” market (from -$46B last week; “down market” defined as the 2.5th percentile price path or ~-2.9% (different than Goldman who uses -4.5%)).

DB also sees CTA positioning as having rebuilt to the top of its historic range, but in the US just at the 63rd percentile (since 2009) still down from the 66th two weeks ago, with the Nasdaq-100 continuing to remain at just the 37th while SPX and RUT at the 66th and 81st down from the 70th and 82nd respectively two weeks ago.

Vol control positioning though, with the drop in volatility noted by Goldman earlier has pushed to the 99th percentile according to DB. “a notably stretched level” from the 67th two weeks ago:

Self-off sensitivity increased over the week but remains below historical median levels. With allocations elevated, capacity for further equity buying is limited and downside flow risks remain meaningful in a sharper drawdown.

Tier1Alpha though says vol control remains far off its highs of the year.

In looking at the 1-month lookback, which remains the dominant trigger with 1-month realized volatility still barely over 3-month, we do drop one 1%+ day although we also have three days of 0.2% or less, and a similar situation with the 3-month lookback, so the outlook for vol control buying is not particularly favorable for a fourth week.

While for risk parity DB says equity positioning “continues to be above neutral” and “strongest in the US” remaining at the 67th percentile from the 37th five weeks ago. That puts it slightly overweight. Bond exposure is at the 37th percentile (“below neutral”) but commodities remain elevated at the 96th (“elevated”).

“Overall, positioning remains broadly balanced in equities, while maintaining a significant tilt toward commodities and inflation hedge assets relative to history.”

While call buying (which adds incremental upside pressure) was more mixed this week after a huge push higher last week.

The 10-DMA of the put/call ratio continued to fall sharply from the highest since April.

But DB notes

The ratio of call to put volume (5d ma) declined this week (87th percentile)…. S&P 500 options skew (3m, 90%-110%) declined slightly this week.

Like call buying, leveraged positioning acts as a “negative gamma source” as Charlie McElligott has put it (meaning that there is added buying/selling pressure from them in the direction of daily flows as they rebalance each day).

Positioning in Nasdaq-100 and SPX leveraged ETFs continued their rebound according to BofA with SPX to the highest in over a year and Nasdaq not far.

And that translated over to single-stock leveraged ETF AUM, which saw broad gains for a second week led by memory stocks MU and SNDK.

Turning to retail, Citadel’s Rubner updated on the return of the retail investor:

Retail returned as a net buyer across our platform last week, reversing the selling at the end of June.

The cash-equity capitulation impulse has faded and participation is rebuilding. But the more interesting signal is in options.

Retail Cash Equities – Net Notional

Average Daily Net Notional by Week (Indexed to Average), 1-Year Lookback

Source: Citadel Securities, Global Market Intelligence, as of August 10, 2026. Figures are for illustrative purposes only. Past performance figures do not guarantee future results.

Retail’s Most Bought Names in May and June – Semiconductors and Memory

Average Daily Net Notional by Week (Indexed to Average), 1-Year Lookback

Source: Citadel Securities, Global Market Intelligence, as of August 10, 2026. Figures are for illustrative purposes only. Past performance figures do not guarantee future results.

While retail was buying cash equities, traders at Citadel Securities were simultaneously hedging through options. Retail was skewed better for sale in options for the first time since April and at the lowest reading since the late March lows.

Broad-based ETF option activity has also surged. Average daily contracts this month have climbed to a record 3.1x the monthly average, while average daily net put premium has risen to approximately $29 million, roughly 8x the one-year average and nearly 10x the historical average.

Retail is buying the market again, but it is still paying for protection.

That distinction matters. Participation has returned, but conviction has not fully followed.

Markets can move quickly from caution to participation, and from participation to chasing.

Retail Options – Call/Put Direction Ratio

Weekly, 1-Year Lookback

Source: Citadel Securities, Global Market Intelligence, as of August 10, 2026. Figures are for illustrative purposes only. Past performance figures do not guarantee future results.

Retail Options – Broad-based ETF Volumes Skyrocket, Driven by Puts

Average Daily Contracts, Monthly (Indexed to Average) Since 2020

Source: Citadel Securities, Global Market Intelligence, as of August 10, 2026. Figures are for illustrative purposes only. Past performance figures do not guarantee future results.

BoA client retail equity positioning also reflected retail rebuilding equity positions with AUM in stocks increasing to 66.4% (up +0.7% w/w to an all-time high after the largest inflow since Sept 2022 (chart), 17.0% in bonds (-0.4% w/w to the lowest since Mar ‘22), while cash fell to 9.4% a new record low.

And Tier1Alpha makes a familiar point that there remains an unrelenting bid from 401(k) inflows:

[Last week], SPX notched its 27th all-time high of the year, bringing its YTD gain to 13.93% and its three-year return to 74.7%. Quite an impressive run, all things considered, especially given the wall of macro and geopolitical risks that have emerged over that time frame.

However, the key thing to remember is that in a market increasingly dominated by passive and non-discretionary strategies, those risks simply do not factor into the equation.

As Mike Green often distills the passive investing dynamic, “You give us money, we buy stocks. You take money, we sell stocks. At what price? Any price.” So who keeps giving these funds money through all of it? Well, if you are one of the roughly 70 million Americans making regular contributions to a 401(k), the answer is YOU are.

Turning to gamma:

BoA saw gamma as of Thursday’s close little changed w/w at $5.0B, the 56th one-year percentile. While last week it was on the verge of flipping negative, as options were restruck during the week, there is now a larger cushion (on both sides) before it tips to negative:

Realized vol fell and SPX hedger gamma hovered near one-year median levels this week, ending 13-Aug at $5.0bn (56th%ile in last year)….hedger gamma remains robustly supported by positive gamma expiries next week (hedgers net long ~15k contracts between 7700 – 7900).

Tier1Alpha’s update was also as of Thursday night and they also see gamma “continue to tread in positive … territory, indicating that lower volatility is expected.” Unlike BofA they continue to not see a flip to negative on the upside but like BofA don’t see it falling negative on the downside until the 7,600 area.

Turning to buybacks, we are now almost to the fully open buyback window with now a little over 80% of discretionary buybacks by index weight (discretionary buybacks represent ~30% of all buybacks) for S&P 500 companies active this week according to Citadel’s Rubner. With the reporting season slowing down appreciably by SPX market cap, that will slowly grind higher over the next month.

While BofA says buybacks “accelerated” for a second week but still -5% y/y on a 4-week average basis from +19% two weeks ago. And they are below the historical average for Week 4 of earnings season when normalized by market cap.

YTD they say annualized buybacks are “slightly below full-year ‘25 levels and below ‘24 records, but above 2016-23 levels,” and as a% of market cap are the least since late 2023 and close to the least since 2021 (on a rolling 52-week basis).

And Goldman with a note showing just how much hyperscaler buybacks have been impacted by capex needs:

hyperscalers financed much of their increased AI investment by reducing buybacks over the last few years...our sector analysts note that they have been willing to borrow and appear undeterred by high interest rates, which likely limits the pressure to cut other spending."

And I mentioned last week that offsetting the return of buybacks, equity issuance has also been significant, with US corporates raising a record amount of equity in Q2 through IPOs, follow-ons, converts, and SPACs. Goldman followed up though saying

Although the dollar volume of follow-on issuance is near a record level, follow-on activity looks more like a return to normal than a boom. Both the number of offerings and the volume of issuance scaled relative to equity market cap are tracking slightly below historical averages. Issuance in 2026 has been highly concentrated: across IPOs and follow-ons, the three largest offerings have accounted for nearly half the total issuance volume YTD.

The magnitude of upcoming equity issuance will depend on both AI investment plans and the appetite of equity investors for additional supply. Companies will be more likely to issue equity if their shares are trading well. Historically, the volume of follow-on issuance has been correlated with the recent strength of equity market returns. In addition, companies typically issue follow-on equity when trading at a valuation premium to the rest of the market, and that pattern has continued YTD.

Raising equity capital typically comes at the cost of modestly lower share prices. During the past 30 years, the median issuer of follow-on equity has experienced a share price decline of about 2% on the day after announcing an offering. That share price has then gradually recovered in subsequent months.

We expect 2026 will be a record year of equity issuance in dollar terms, but supply relative to the size of the equity market will remain low. We estimate roughly $700 billion of corporate equity supply in 2026, combining IPO volume of slightly more than $225 billion and other issuance of $450 billion. This equates to roughly 1% of Russell 3000 market cap in total, similar to average annual issuance from 2015-2019.

Although equity issuance has increased this year, buybacks have been more resilient than many investors appreciate. S&P 500 buyback growth is tracking at +11% year/year in Q2. Although the hyperscalers have reallocated cash flow from buybacks to capex, other companies including banks and semiconductors have been expanding their repurchase programs. Total US buyback authorizations are running at a record $989 billion YTD.

Overall, despite the increase in US equity issuance, we continue to expect that corporate equity demand will outweigh supply in 2026 [by the least amoung through since 2003]. We estimate $1.4 trillion of gross share repurchases across the US public market. This should outweigh both direct corporate equity issuance and the large potential additional supply from expiring post-IPO lockups, even assuming unrealistically that all unlocked shares are immediately sold.

Sentiment

Sentiment was mixed this week:

American Association of Individual Investors (AAII) sees bulls edge lower, remaining below the level of the bears (little changed) for a fourth week (and 19th in 24):

AAII bulls (those who see higher stock prices in 6 mths, blue line) edged to 34.7% from 37.0% the prior week (still well above the 29.6% three weeks ago, the least since September), and remaining below the long-term historic average of 37.5% for a fourth week.

Bulls also remained below the level of the bears (who see lower stock prices in 6 mths, red line) for a fourth week (and the 19th week in the last 24) with the bears almost unchanged at 37.9% from 38.0%. Bears also remain above the long-term average of 31.0% for a 26th straight week (and they’ve only been below it 9 weeks since Dec 12, 2024).

The Neutral camp (yellow line) came in at 27.4% up from 25.0% the prior week. It remains under the long-run average of 31.5% and has been over that only twice since July 2024

And the Investors Intelligence Bull-Bear Spread has pushed up to 42.6%, but as Willie Delwiche, CMT, CFA notes in his Substack, periods above 20% are associated with equity gains (and vice versa): “new highs fuel optimism and optimism fuels strength. Rinse and repeat. It takes bulls to have a bull market.”

But Goldman’s US Equity Sentiment Indicator*, eased back for a third week to 0.69, falling back under the “stretched” threshold of 1.0 for the first time in three weeks and second-lowest since June.

The current reading is since 2009 consistent with a 1-month average return of ~-1% although the positive rate is weak at just over 50%.

*The indicator combines “six weekly and three monthly indicators that span [across the more than 80% of the US equity market that is owned by institutional, retail and foreign investors]. Readings of +1.0 or higher have historically signaled stretched equity positioning. Readings of -1.0 or lower have signaled very light positioning and have historically been a statistically significant signal for subsequent S&P 500 performance”.

The CNN Fear & Greed Index (blue line) up for a fourth week hitting 66.6 Thursday, the highest since May 8th and up from 39.4 three weeks ago. The indicator thus remains in “Greed”.

Now five of seven indicators above Neutral with just one below:

Extreme Greed = safe haven demand (20-day difference in stock/bond returns) (from Greed); junk bond demand (vs investment grade)

Greed = market momentum (SPX vs 125-DMA) (from Extreme Greed); stock price breadth (McClellan Volume Summation Index) (from Fear); put/call options (5-day put/call ratio) (from Extreme Greed)

Neutral = market volatility (VIX & its 50-DMA)

Fear = stock price strength (net new 52-week highs)

Extreme Fear = None

https://www.cnn.com/markets/fear-and-greed

Fear & Greed Index

What emotion is driving the market now?

横向滑动查看完整图表

It's useful to look at stock market levels compared to where they've been over the past few months. When the S&P 500 is above its moving or rolling average of the prior 125 trading days, that's a sign of positive momentum. But if the index is below this average, it shows investors are getting skittish. The Fear & Greed Index uses slowing momentum as a signal for Fear and a growing momentum for Greed.

横向滑动查看完整图表

A few big stocks can skew returns for the market. It's important to also know how many stocks are doing well versus those that are struggling. This shows the number of stocks on the NYSE at 52-week highs compared to those at 52-week lows. When there are many more highs than lows, that's a bullish sign and signals Greed.

横向滑动查看完整图表

The market is made up of thousands of stocks. And on any given day, investors are actively buying and selling them. This measure looks at the amount, or volume, of shares on the NYSE that are rising compared to the number of shares that are falling. A low (or even negative) number is a bearish sign. The Fear & Greed Index uses decreasing trading volume as a signal for Fear.

横向滑动查看完整图表

Options are contracts that give investors the right to buy or sell stocks, indexes or other financial securities at an agreed upon price and date. Puts are the option to sell while calls are the option to buy. When the ratio of puts to calls is rising, it is usually a sign investors are growing more nervous. A ratio above 1 is considered bearish. The Fear & Greed Index uses a bearish options ratio as a signal for Fear.

横向滑动查看完整图表

The most well-known measure of market sentiment is the CBOE Volatility Index, or VIX. The VIX measures expected price fluctuations or volatility in the S&P 500 Index options over the next 30 days. The VIX often drops on days when the broader market rallies and soars when stocks plunge. But the key is to look at the VIX over time. It tends to be lower in bull markets and higher when the bears are in control. The Fear & Greed Index uses increasing market volatility as a signal for Fear.

横向滑动查看完整图表

Stocks are riskier than bonds. But the reward for investing in stocks over the long haul is greater. Still, bonds can outperform stocks over short periods. Safe Haven Demand shows the difference between Treasury bond and stock returns over the past 20 trading days. Bonds do better when investors are scared. The Fear & Greed Index uses increasing safe haven demand as a signal for Fear.

横向滑动查看完整图表

Junk bonds carry a higher risk of default compared to other bonds. Bond yields—or the return you get on investing in a bond—dip when prices go up. If investors crave junk bonds, the yields drop. Likewise, yields rise when people are selling. So a smaller difference (or spread) between yields for junk bonds and safer government bonds is a sign investors are taking on more risk. A wider spread shows more caution. The Fear & Greed Index uses junk bond demand as a signal for Greed.

And BoA’s Bull & Bear Indicator fell to 9.3 from 9.7, which was the highest since 2021 according to last week’s report, but still remaining above its sell signal (8.0) which it crossed back above the week of May 22nd:

“falls to 9.3 from 9.7 on weaker flows to HY bonds, outflows from tech & healthcare; positioning excessively bullish (caveat “greed” always more difficult to reverse than “fear”)… since May 26th “sell signal” SPX up 4%, ACWI up 3% (albeit -5% drawdown May 26th to July 30th, stopped by US/Japan FX intervention & bumper Mag7 EPS); excess positioning interrupts bull markets, but end of bull market requires combo of excess positioning, excess profit optimism and policy tightening; note “old” Bull & Bear Indicator at 7.8.”

[From prior weeks]:

BofA Bull & Bear “sell signal” remains in place, extreme bull positioning says markets “toppy”, reduce equity exposure, retreat or rotate much smarter summer tactic for risk assets than reload.

17 “sell signals” since '02, average loss for global stocks over 2-3 months is 2-3% (hit ratio of ~60%), with max drawdowns of 15-20% (caveats always “tops are a process, lows are a moment”, i.e. greed harder to reverse than fear).

And Helene Meisler’s followers remain bullish for a third week, although easing back a bit.

While the Citi panic/euphoria index remains squarely in Euphoria although easing back off the highs. I should note it has had a fairly poor track record over the past couple of years (I will post the details in an upcoming week).

Seasonality

As we move into the second half of August seasonality improves to middle of the pack with a 0.5% median increase.

And trading days 11-15 of August are a rare period where the mid-term seasonals are better than all years.

And we continue to run well above the average mid-term year.

Rates/Fed

Turning to interest rates, I noted three weeks ago that after thinking that a rate hike this year was a low probability event, the chatter from Fed members, including the new Chair, made me “increasingly convinced that a hike is a real possibility this year, something I thought was unlikely absent a continued push higher in inflation.”

And then last week I said:

Chair Warsh (assuming I’m right that he doesn’t want to raise rates) got some “welcome” (if you can call a weak jobs report “welcome”) relief in the payrolls report… but markets cut expectations and yields only marginally, meaning it will take a lot more than that to take the pressure off for one or more hikes this year.

That makes the August jobs report and the two sets of CPI/PPI reports we’ll get (starting next week) likely the deciding factors (although of course Warsh has the opportunity to “set the table” for the rest of the year with his Jackson Hole speech at the end of the month (though few expect him to do that).

And Warsh got “some” if not “a lot” more in not only the in-line CPI (but that was enough to see core CPI slow to a 5-year low) but also a cool PPI and a weak retail sales report. As noted in the Friday update that overall saw a significant reduction in expectations for a September rate hike to around a third from well over 50% a week ago.

Most think if they don’t go in September there’s little chance they go in October just a handful of days before the mid-term elections. That would push a first rate hike to December which stands at a two-thirds chance currently. A lot of data between now and then as well as Warsh’s Jackson Hole the week after next, so I continue to think we don’t get a hike this year but that may very well change after Jackson Hole.

And as noted in the CPI blogpost, BofA is starting to caveat their call for three hikes this year (which I continue to think is unlikely).

"Based on the details of the [CPI] data, we revised our core PCE tracking estimate from 0.24% m/m to 0.19% m/m.... "We are sticking with our base case of 75bp of hikes this year, starting in Sep. But the somewhat benign inflation data over the last two months have increased the risks that hikes will either be delayed (e.g., they might start in Dec) or won't materialize.

But Ed Yardeni is sticking with his call for a rate hike.

Yardeni (from Thursday): The July CPI report was good news for Fed officials and the rest of us. Inflation is moving closer to the Fed's 2.0% target. However, the inflation picture may not be as bright as the CPI report suggests.

New York Fed President John Williams recently said that if core PCED inflation readings remain above 0.2% m/m during the second half of this year, then the Fed should tighten monetary policy. The Cleveland Fed's Inflation Nowcasting model continues to estimate a 0.25% m/m increase in core PCED inflation for July and 0.27% for August. The Fed gives more weight to the core PCED than the core CPI in setting monetary policy.

That helps explain why the 2-year US Treasury yield remains roughly 75 basis points above the federal funds rate, suggesting that fixed-income markets continue to expect a Fed rate hike in the coming months (chart). The 10-year Treasury yield also remained elevated, at 4.68%, after the CPI report.

But the softening in near-term Fed rate hike expectations hasn’t done much to soften longer term rates. Both the 10-2yr yield curve and 30-10yr yield curve at the highest since May.

And in the short-term we could see further curve steepening with BofA saying “CTA buying at the front-end may … be just beginning and could intensify next week if yields continue to fall. By contrast, back-end shorts remain intact and near their largest since May 2021.” At some point those back-end (longer maturity) CTAs will cover though which will see rates soften.

And one thing that might see CTAs starting to buy is expected 30-day Treasury market volatility (MOVE index) has eased back to a 1-month low.

10-year term premium (the "risk premium" for buying longer duration bonds above inflation and Fed rate expectations) has risen sharply since the start of July (hitting at one point the highest since 2011 according to one measure).

While there are a host of reasons from indigestion with the Fed's new no guidance policy to continued economic resilience to ever-growing deficits to explain it, Nomura’s Jon Cohn had another interesting potential culprit: reverse crowding out.

With nearly two-thirds of AI-related high-grade supply since 2025 10 years or greater in maturity, "mega-cap tech issuance this year is about 25% the size of net Treasury issuance (ex-bills) to private investors (i.e., excluding the Fed), up from 5% in 2025,” Cohn wrote (and if you “widen the scope of what qualifies as ‘AI-related’ issuance,” it comes to nearly $500B YTD he wrote).

"the sheer amount of duration supply forced onto the market at the long-end” is likely to continue to put pressure on long-end Treasury rates he concludes.

In terms of inflation expectations the Fed favorite 5-year, 5-year forward rate (expected inflation for the 5 years starting 5 years from now), edged up to +2.30%, remaining in its range over the past five years but towards the top of the 1-year range.

For now we remain in my new ranges established two weeks ago: “I still think that 5% on the 10-year and 5.75% on the 30-year represent areas where we will see very strong buying. On the 2-year I think a lot depends on whether the Fed hikes. If they do there’s potentially another ~25 basis points to the upside. If they don’t, I think we’re going lower from here [we’re down around 20 basis points since I wrote that].”

Here’s a link to the Friday update if you want to review where rates and Fed hike expectations currently stand.

Wrap-Up

As I wrote last Sunday:

So will the now “on again” AI trade continue? The evidence is there, with momentum building, expected earnings continuing to ratchet higher, and positioning not yet “extreme” according to DB.

And the overall setup remains favorable as well, with systematics biased to buy according to BofA, discretionary and hedge fund positioning light according to DB and Goldman, buybacks almost back to full strength, retail re-engaging, the economy remaining resilient even if pay growth continues to ease — something we’ll need to keep an eye on — and earnings growth spectacular.

Sentiment is not really a tailwind but not yet a headwind — “it takes bulls to have a bull market” — seasonality is not great, and rates are pushing up toward levels that may cause some indigestion, but none of those are yet at levels that I would consider “red flags.”

And as discussed at the top, it appears from the most recent indications that President Trump has no appetite for dialing things up militarily at this point, which means it’s likely things will drag on with little change through the midterms unless or until Iran decides it wants to reopen the Strait.

And for the most part that all remains the case for the upcoming week. We even get seasonality turning a bit more favorable.

And with the seemingly never ending catalysts this summer, we didn’t get to a more typical low volume summer drift until the end of last week. Perhaps we will see that continue for this week given the dearth of major catalysts (as noted Friday, Bank of America designed their forward looking US Economic report to cover all the way through the end of the month if that gives you an idea).

I said two Sundays ago that I was becoming more constructive, and that remains the case heading into the coming week

DB: Pullbacks of -5% or more have historically occurred every 3 to 4 months.