Weekly Market Recap

As summer draws to a close, the heat remains for the world’s major central banks. This month, all of them set rates and for once, the outlook points in different directions.

The U.S. attempted to set the tone a couple of weeks ago, when Federal Reserve (the Fed) Chair Kevin Warsh spoke at the Jackson Hole Economic Policy Symposium. His message was uncompromising: the inflation target is not up for negotiation and rates may need to rise.

The market reaction was striking, with the dollar rallying and gold and bonds easing. Having talked tough on inflation before without following through, with his own credibility already under scrutiny, any hint of softness should have been unthinkable. The implied odds of a U.S. rate hike moved from possible to probable.

It is consumer price inflation rather than an overheating jobs market that’s pressing the Fed into action. This message was underscored by a full week of U.S. labour market data, which suggested lower staff turnover as staff feel less confident about being able to move to higher-paying jobs. Meanwhile, surveys suggested staff demand remains healthy.

That culminated in a stronger-than-expected jobs report showing 167,000 new jobs created in August, and a small upgrade to last month’s surprisingly weak report. It is likely enough to spur the Fed into action even though wage growth remained modest, and the unemployment rate was unchanged, with labour force participation increasing.

A different kind of U.S. policy shift occurred in relation to the Iran war. Having announced a shift from military to economic pressure, the U.S. has been drawn back into hot conflict, putting further upward pressure on consumer prices.

Europe’s gas problem returns

European bond yields pushed higher over the week as gas futures climbed on fears of supply shortages. Inventories have been low for the season, as buyers held off in the hope that peace in the Middle East would bring prices down. With the regional conflict dragging on, those hopes have been dashed.

It has been easier for crude tankers to navigate the Strait of Hormuz, but shipping of liquefied natural gas (LNG) remains severely impaired given the danger of a potential strike on an LNG carrier (a specialised ship designed to transport liquefied natural gas).

Benchmark Dutch gas futures are now more than double their pre-war levels. For Europe, energy costs continue to drive the inflation story and help explain why the European Central Bank (ECB) is expected to raise rates next week.

The U.S. decision, which will be made in a couple of weeks, is tough to predict, but the central bank is expected to raise its federal funds rate. Meanwhile, the UK’s Bank of England (BoE) is likely to remain on hold. That is despite last week’s British Retail Consortium shop price index showing the second-round effects of earlier energy price increases continuing.

However, retail activity remains subdued, and house prices have softened. Even the business surveys show momentum is fading and with UK interest rates being amongst the highest of developed markets, the BoE perceives them as restrictive.

Leaning into gold

Gold had been weighed down by negative momentum and worries over central banks drawing down reserves during the U.S.-Iran conflict. That has given way to renewed interest in the debasement trade, the idea that persistent fiscal pressures erode the value of paper money over time. Warsh’s hawkish speech knocked gold temporarily and fresh hostilities with Iran added a further headwind by slowing reserve accumulation.

Debasement can come through Fed inaction; but the greater concerns are around the Fed’s independence being undermined. In the absence of something transformative happening to the national debt, debasement will remain the path of least resistance and we’re happy to let the gold weighting float higher.

Correspondingly, we remain underweight in bonds. Long-term yields have been rising due to uncertainty about the future path of interest rates and inflation. A credible Fed, one that convincingly anchors inflation, would be helpful in restraining yields in time that probably starts with a September hike.

On equities, valuation remains the perennial worry. U.S. cyclically adjusted valuations sit close to prior peaks, though they’ve been higher in other markets before. Look beneath the surface and the picture is more balanced: just over half of S&P 500 companies trade on lower price-to-earnings ratios than their five-year average.

The aggregate multiple has crept up largely because a few high-priced names, Tesla among them, now carry more weight, but some of the biggest and best performing stocks have become significantly cheaper because their prices haven’t risen with their earnings. This shows that investors are questioning whether this extraordinary run of earnings can be sustained.

The past two quarters have beaten even year-ahead forecasts, something usually seen only coming out of a shock. This sets a demanding bar for next year’s comparisons but also suggests that analysts have been expecting a cyclical slowdown during what’s so far been a period of secular growth.

Last week saw Nvidia reporting earnings, which effectively lowers the curtain on the second-quarter earnings season. That means fewer obvious catalysts for uplifts until October, when third-quarter numbers begin to arrive. So, while the flow of corporate news ebbs, the controversies that remain are over what appear to be objectively high valuations and unproven business models.

For some time, market milestones have invited comparisons with valuations of the past. Over the summer, the Financial Times observed that U.S. equity valuations now sit higher than in September 1929, surpassed only by the peak of the dot-com bubble. It is a comparison that demands respect, and we take the underlying caution seriously, however context matters.

The metric being cited is the analytically useful, cyclically adjusted price/earnings (CAPE) ratio, which measures the real price over the 10-year average adjusted earnings (with both price and earnings adjusted for inflation). 

While U.S. valuations have only reached today’s levels once before, during the tech bubble, there’s still a further 26% upside to the peak they eventually reached. Look beyond the U.S., though, and valuations are far less stretched. Global equity valuations are dragged down by their weighting towards other regions.

Anchoring to the tech bubble valuation peak is also unhelpful because the peak for equity valuations was neither in the U.S. nor in 1999, it was in 1989 Japan, when valuations reached multiples of the highest levels.

The deeper point is that valuations are just numbers that need to be reconciled against the pace of profits growth, not just their level. In early 2000, the market’s largest company, Microsoft, briefly touched earnings growth near 80%. 

Today’s largest, Nvidia, has now enjoyed multiple years growing much faster than that. Its valuation seems high looking backwards, as CAPE does, but less than 20 times 2027 earnings does not seem demanding.

Its results, announced last Wednesday night, were strong, with quarterly revenue close to doubling year-on-year and a first-ever full-year forward guidance of 70% growth, which is only that modest due to supply constraints.

Is the AI trade resting on shaky foundations?

The more interesting debate is subtler. The performance gap between the frontier AI labs, OpenAI, Anthropic and cheaper open-weight models has narrowed sharply, from perhaps 12–18 months to as little as three to six. 

That threatens the labs’ pricing power and they’ve made vast spending commitments to the hyperscalers (large cloud providers) who host them. Microsoft alone carries roughly USD281 billion of contracted backlog tied to OpenAI, part of a group total near USD700 billion.

So, it does make sense to wonder: what would the impact be if OpenAI and Anthropic found they couldn’t charge premium prices for their premium product? How does this affect the hyperscalers? Our read is measured.

Microsoft’s Azure platform is deliberately model agnostic. With over 11,000 models available, its economics are driven by total utilisation rather than any single customer. If OpenAI stumbled, that capacity would be redistributed to the enterprise demand queuing behind it, after a digestion period. Reduced demand from the AI labs, or reduced demand because of gains in model efficiency, would enable hyperscalers to slow their capital expenditure (capex).

So, does the real risk lay with the recipients of that capex? Back to the likes of Nvidia, which may also be at risk from greater efficiency in custom silicon as well? It is a risk, but historical examples of this kind of technology show that efficiency gains tend to unleash more demand than they destroy.

Jevons’ paradox noted that as steam engines became more efficient, rather than reducing coal demand, they increased it because steam became a much more accessible technology. So far, that pattern seems to be holding for AI too. For Nvidia, cheaper open-weight models running on its highly flexible platform are a tailwind, not a threat.

Restoring credibility

It is an open secret that public officials don’t always end up keeping their promises, but it feels like recent years have seen an unusual amount of policy flexibility. The UK’s debate over what increased taxes might mean for working people contributed to the change of its government. The U.S. plan to end military interventions has seen it mired in war in the Middle East.

Central bankers are assumed to be immune from the political pressures that lead to policy flexibility, but they can’t escape the financial pressures. So, inflation remaining persistently above target and governments delivering persistent budget deficits have created concerns that monetary policy is being directed at eroding debt burdens rather than managing inflation, a state known as fiscal dominance.

The relatively new Federal Reserve (Fed) Chair, Kevin Warsh, had the job of rebutting such concerns at last week’s Jackson Hole Economic Policy Symposium. He did so forcefully, acknowledging that inflation has not meaningfully slowed and that the Fed has work to do. 

He reiterated the inflation target, said that short-term interest rates are the primary policy tool and acknowledged that the economy had strengthened. Without explicitly offering guidance, he gave the distinct impression that a rate hike was likely in mid-September.

That prospect saw a strong U.S. dollar and weaker bonds as Warsh affirmed the Fed’s commitment to controlling inflation with higher interest rates. That weighed on gold as it indicated the Fed won’t facilitate further inflating away national debt.

However, a lot could happen this week to tip the scales for or against a rate hike. A host of jobs data will come in on Friday, including the non-farm payrolls report, which was surprisingly downbeat last month.

What’s coming up?

Jobs news: 

If Friday’s employment report shows a rebound, interest rate hikes could be back on the agenda.

Global PMIs: 

Provisional purchasing managers’ indexes showed modest momentum loss in an ongoing expansion, but full data will provide more detail.

Question time: 

The UK prime minister faces his first prime minister’s questions, riding a poll bounce.

A recurring concern for investors during extraordinary periods of expansion has been the sustainability of debt. How can the good times continue when the debt-to-GDP (gross domestic product) ratio keeps increasing and with it the share of tax revenue being spent on interest payments alone?

The maths is straightforward, if uncomfortable. The most obvious way a government can improve its debt position is by cutting spending or raising taxes, but these are both politically thankless, whether you lean left or right. And while there was a brief period following the Great Financial Crisis in which fiscal repair was not completely rejected by voters, those halcyon days have passed.

For example, Atul Bhatia from the RBC Brewin Dolphin U.S. fixed income team describes U.S. policymakers as “one-way Keynesians”, they ramp up spending during economic shocks (such as a global pandemic), but neglect to run a corresponding budgetary surplus during better times.

If spending cuts and tax rises are politically untouchable, the only remaining route to lowering debt is by widening the gap between growth and borrowing costs. An optimistic scenario is that an AI miracle results in high growth and lowers inflation and therefore interest rates, allowing countries to outgrow their debt. While this is possible, it’s but one possibility. 

A particularly vigorous AI revolution could, for example, result in lower employment and higher benefits payments, which would have quite a different impact on public finances.

What does seem likely though, partly because it’s already happening, is that governments can achieve the same result with nominal growth (which includes inflation) rather than real growth. It’s quite customary for nominal growth to exceed interest rates, allowing countries to either pay down debt or, more commonly, run fiscal deficits. Widening that gap would give policymakers more palatable options.

To see this in action, Japan, the most indebted major economy in the world, has trimmed its debt-to-GDP ratio since 2020 by precisely this route: inflation has risen faster than interest rates even as the country continued to run a budget deficit.

With that in mind, U.S. Secretary to the Treasury, Scott Bessent, confirmed it would at least double its buybacks of outstanding 10-year to 30-year debt, lifting operations from $2 billion to $4 billion. That saw a rally in the bond market. It was short-lived, but the buybacks announced won’t start until September, so this doesn’t mean it’s been futile.

When long-dated Treasury bond buybacks first began under former Secretary to the Treasury, Janet Yellen in 2024, ostensibly to manage liquidity, they were considered controversial by some. But last week’s events seem to connect the policy to the management of bond yields (interest rates). 

It comes shortly after the U.S. sold euros to buy yen to spare Japan from selling its U.S. Treasury holdings. Demand for Treasuries is also being supported in other ways, such as making it easier for banks to hold them and potentially creating demand as collateral for stablecoins.

Now it seems possible to join the dots and see steps being taken towards a regime in which above-target inflation is tolerated, and low interest rates are targeted to ease the servicing, or even reduction, of debt. 

Over the long term, this creates opportunities in the form of a steeper yield curve. This would weigh on the dollar relative to less repressive currencies and would highlight the attractions of real assets with limited supply, such as gold.

The implication for portfolios is one we’ve been building towards for some time. If governments lean on inflation to manage their debts, longer-dated bonds look vulnerable, there’s overwhelming pressure to cap yields, but little natural limit on how much debt can be issued. 

Assets, whose supply is genuinely constrained (gold being chief among them), become more appealing by contrast. 

UK ‘stagflationary’ pressure remains

Closer to home, UK inflation data for July came in at an annual rate of 2.9%. It’s the first rise in four months and a touch above expectations on the core measure.

These figures were the first to reflect higher household utility bills due to the U.S.-Iran conflict and because of the lagged impact of the regulatory price cap. Fortunately, that landed during a month when fuel costs fell.

Beneath the surface, the signals are mixed: services inflation eased to 3.4%, but that was largely airfares and the Bank of England’s (BoE) preferred underlying measure, the Consumer Price Index, actually rose to an annualised 2.9% in July, up from 2.6% in June.

Another way of gauging underlying pressure is the median category price change, which reached its highest level since mid-2025, suggesting inflationary pressure remains.
Despite this, there’s definitely a better mood in the UK at the moment, which seems to have coincided with new Prime Minister Andy Burnham having a more optimistic tone.

Consumer confidence rebounded to its highest since 2024, notably, the strongest reading under the current government. Yet retail sales slipped slightly, flattered only by a World Cup boost to food and drink. Public finances continued to show how difficult the new chancellor’s job will be ahead of October’s budget.

Employment data released last week told a similar tale of tension: payrolls fell for a second month, and vacancies hit a five-year low, yet wage growth held firm at 3.5%. That awkward combination, slack in jobs, stickiness in pay, has left markets expecting the BoE to hold interest rates at its next meeting in September.

What’s coming up?

Nvidia earnings: 

The American tech company will release one of the most closely anticipated earnings results as the second-quarter earnings season draws to a close.

Jackson Hole: 

Central bankers will be heading to Jackson Hole for the annual Economic Policy Symposium, where Fed Chair Kevin Warsh will speak on Friday.

U.S. inflation:

The Fed’s preferred measure of inflation – the Personal Consumption Expenditures Price Index – is released.

U.S. data gave markets something close to a Goldilocks combination last week. U.S. inflation cooled following weaker jobs data, but there is still little evidence of a broader downturn.

The July headline Consumer Price Index (CPI) rose just 0.1% over the month, taking annual inflation down to 3.4% from 3.5%. More importantly, core inflation rose 0.2%, with the annual rate easing to 2.5%. This was reassuring after surging oil prices raised fears that inflation could reaccelerate.

There were some yellow flags beneath the surface. Core goods prices accelerated and services inflation also remains sticky.

But producer prices provided relief. The headline Producer Price Index (PPI) was unchanged in July, contradicting expectations for an increase, while the annual rate slowed to 4.7% from 5.5%. This suggests the pipeline inflation pressure is weaker than feared.

Taken together, CPI and PPI have reduced the urgency for the Federal Reserve (the Fed) to immediately raise interest rates again. This comes after last week’s surprisingly weak jobs report, which showed the U.S. economy lost 23,000 jobs in July. Retail sales also contracted in July, which provided another important test of consumer momentum.

Interestingly, markets currently seem comfortable with a little weakness in U.S. data as investors still see resilience rather than recession. That distinction is important. The broader economy remains resilient and crucially, corporate profits are exceptionally strong.

Some moderation in employment and consumer spending can be helpful for markets if it takes pressure off the Fed.

Markets sharply reduced the probability of a September rate hike following the inflation data, although an increase later this year remains possible. For equities, that is a relatively favourable combination: growth is cooling enough to give the Fed room to wait, but not enough to derail corporate profits.

However, oil continues to be the obvious challenge to this Goldilocks scenario.

Markets learn to live with Hormuz

Developments surrounding the Strait of Hormuz remain one of the biggest macro risks facing markets given the unprecedented supply shock, but investors have become noticeably less reactive to each new headline.

The conflict remains unresolved and the Strait continues to face severe disruption. The U.S. has intensified its threats towards Iran, while Washington is preparing what Treasury Secretary Scott Bessent has described as “unprecedented additional economic measures” against Tehran.

President Donald Trump has alternated between a more conciliatory tone and renewed threats of pressure, creating occasional flare-ups in oil prices. Brent crude oil has nevertheless remained around the high-USD80s per barrel, well below its earlier wartime peaks.

A renewed surge in oil would of course be a concern. It could push inflation higher again and potentially force the Fed back towards tightening.

Despite this uncertainty, the S&P 500 reached record highs.

There is an element of geopolitical fatigue here. After months of U.S.-Iran tensions, markets are becoming more immune to individual headlines. Unless an escalation materially changes the outlook for energy supply, inflation or economic growth, investors appear increasingly willing to look through it.

Ultimately, fundamentals matter more. And right now, those fundamentals remain supportive.

Earnings give the bull market firmer foundations

The second-quarter U.S. earnings season has been extraordinary.

With almost 90% of the S&P 500 having reported by the end of last week, blended earnings growth stood at 50.4% year-on-year. That headline earnings growth number is inflated by hyperscalers’ investment gains from SpaceX, Anthropic and Open AI.

Adjusting for those exceptional items that are not related to underlying business operations, S&P 500 earnings growth was still around 32%. The strength of corporate America is not simply an accounting effect or an AI story.

At the same time, we are seeing more evidence that enormous investment in AI is translating into revenue and profit. Cloud demand specifically tied to AI has boomed, semiconductor earnings have surged and AI-related infrastructure spending continues to feed through the broader economy.

Perhaps even more encouraging is the broadening of the rally. Technology remains a major earnings engine, but profit growth is becoming less concentrated. That gives the bull market a healthier foundation than one driven purely by a handful of mega-cap stocks and rising valuations.

There are still risks. Expectations for AI are extremely high, valuations leave less room for disappointment, capital expenditure continues to rise rapidly, and free cash flow from hyperscalers have deteriorated.

But for now, the combination of strong earnings, improving AI monetisation and broader participation in profit growth gives investors a fundamental reason to remain constructive. That also explains why markets have been able to absorb softer economic data and persistent geopolitical uncertainty. The macro backdrop may be cooling, but corporate America is not.

What’s coming up?

Fed minutes:

Minutes from the Fed’s July meeting are released on Wednesday. Markets will be looking for clues on what would trigger a hike later this year.

UK inflation and jobs:

UK July CPI and labour market data will be due, giving a fresh perspective for the Bank of England on whether it is sensible to be on hold.

Global Purchasing Managers indices:

These timely private surveys will help investors assess whether recent softer labour market data represents healthy cooling or something more concerning.

Markets opened the week by responding to reports of a possible de-escalation in the Persian Gulf.

Oil fell from a July high of USD100 per barrel to below USD80 per barrel, a striking move given the collapse of the previous U.S.-Iran ceasefire. A new agreement to reopen the Strait of Hormuz appears to be in preparation, which would entail inbound shipping via Iran, outbound shipping via Oman, both sides clearing mines and no tolls charged. President Donald Trump sounded constructive, while retaining the threat of military action.

Since the onset of the conflict, crude prices have remained lower than analysts would have expected given the scale of supply disruption, and they have tended to fall on any sign of de-escalation. Barriers to a full reopening of the Strait remain high, with Iran appearing to have demonstrated that it can wield influence over the waterway at will.

For portfolios, the practical implication is familiar: energy prices feed through to inflation, central bank thinking, and the cost of everything from a refinery run to an airline ticket. It’s best to avoid getting whipsawed by headlines that change by the day.

AI stocks and shifting sentiment

Alongside the Gulf, AI remained the dominant concern for equity markets.

July saw a sharp rotation out of the AI spending beneficiaries, the companies that sell the equipment used by the AI ecosystem. Bottlenecks in the supply of specific components, most notably high-bandwidth memory (a specialist chip used in AI servers), drove a substantial rally from March to June while July brought a sharp reversal.

The sell-off reflected several factors. Open-weight models (AI systems whose underlying code is publicly available) have been making significant advances in efficiency, suggesting that less server capacity may be required to run them.

Hyperscalers, the large cloud providers driving the bulk of investment, have also depleted their free cashflow and may face funding constraints. A significant factor, however, appears to have been a single hedge fund forced to unwind well-known leveraged positions; once the situation resolved, the stocks rallied, though some nervousness persists.

SpaceX captured the market’s conflicting mood. Results beat on earnings and revenue but were overshadowed by a sharp rise in AI-related capital spending. The stock fell 7% after hours (having gained 9% during the previous session).

Real economy signals a mixed picture

The week brought a range of U.S. jobs data, with stability the best overall description. There was little change in job openings, resignations and layoffs, and jobless claims nearly reached an all-time low.

Purchasing managers’ surveys (which track activity across manufacturing and services) showed employment increasing modestly alongside a broad improvement in economic activity across regions and sectors.

It’s notable that the U.S. no longer stands out as the sole beacon of growth. European economic surprises have exceeded those of the U.S. recently, and the stock market is no longer being driven by a narrow group of AI-related stocks, having seen much broader participation recently.

The synchronicity of that improvement should be enough to shift the window of anxiety from growth towards inflation.

However, at a time when numerous sources seem to be showing an improving employment picture, the July employment report from the Bureau of Labor Statistics showed a surprise decline of 23,000 jobs. This fell far short of forecasts, which had predicted an increase of up to 80,000 new jobs. Wage and pay growth also slowed.

This may confuse the outlook for the U.S. jobs market, but it should be reassuring for investors, as many have been concerned about the potential need for interest rates to rise. An increase in September was hanging in the balance, but this seems a bit less likely now.

What is coming up?

U.S. July inflation:

The inflation rate will be a key political and economic gauge ahead of November’s U.S. mid-term elections, with direct implications for the Federal Reserve’s rate path.

UK Q2 GDP (first estimate):

The new Prime Minister Andy Burnham will be watching GDP data closely as he prepares for his first budget on 28 October.

Retail sales:

Oil’s retreat has improved business confidence, but the question is whether U.S. and UK consumers have returned to the high street.

Last week saw global equities move higher overall, but beneath the surface markets became more selective. While the S&P 500 gained, leadership shifted as investors reassessed which companies are genuinely benefiting from the AI boom. 

The bond markets were also in focus, with the US 30-year Treasury yield reaching its highest level since 2007 after the Federal Reserve kept rates unchanged and offered little guidance on the path ahead. Meanwhile, easing concerns over an immediate escalation in the Middle East helped Brent crude fall almost 7% over the week, providing some relief for inflation expectations.

The AI story evolves

The week's earnings season reinforced that investors are no longer rewarding companies simply for participating in the AI theme. Microsoft surged up 21.8% over the week after reporting stronger-than-expected cloud growth and demonstrating clear commercial benefits from its AI investments. 

Amazon also impressed, supported by accelerating growth at AWS and increased capital expenditure plans. By contrast, weaker guidance from Apple and softer expectations around future growth from Meta were met with a much cooler reception. 

The semiconductor sector, often viewed as a key beneficiary of AI spending, struggled overall despite a sharp late-week rebound. The message from markets appears clear: investors are increasingly demanding evidence that spending is translating into revenues and profits.

Central banks and geopolitics remain in focus

Alongside earnings, investors continued to navigate an uncertain macroeconomic backdrop. The Federal Reserve left interest rates unchanged, while markets interpreted the Bank of England's decision and accompanying commentary as less hawkish than feared, helping support UK government bonds. Geopolitics also remained a major influence. 

Early in the last week, renewed tensions between the US and Iran pushed oil prices sharply higher, only for those moves to reverse as hopes of renewed diplomacy emerged. 

By the end of the week, optimism surrounding fresh US-Iran negotiations and a reduced likelihood of near-term military escalation helped push oil prices lower and supported risk sentiment more broadly.

What is coming up?

Attention now shifts to the US labour market, with a series of employment reports culminating in Friday's non-farm payrolls release. 

Recent market movements suggest investors are becoming increasingly sensitive to signs that economic growth may be slowing as higher interest rate expectations continue to work through the economy.

At the same time, equity valuations remain demanding and bond yields are near multi-year highs, leaving little room for disappointment.

Against that backdrop, the key question for markets is whether incoming data justify the market's relatively constructive growth outlook against a backdrop of higher bond yields and still-elevated geopolitical uncertainty.