August 2026 Market Recap: AI Rebounds as Investors Brace for the Fed

August delivered a significant rebound for U.S. equities following July’s volatility, with technology and AI-related stocks leading the recovery. The S&P 500 gained 2.72% during the month, while the Bloomberg U.S. Aggregate Bond Index returned 0.39%.

The recovery, however, came against an increasingly complicated economic backdrop. Inflation showed further signs of improvement, but the labor market weakened considerably. Long-term Treasury yields climbed to levels not seen in nearly two decades (30-year U.S. treasury yield at 5.25% on 8/31/2026 vs previous high of 5.29% on 04/30/2004, per CNBC), uncertainty surrounding the conflict with Iran persisted, and Federal Reserve Chair Kevin Warsh left investors contemplating the possibility of another interest-rate hike in September.

Meanwhile, corporate earnings provided perhaps the month's most encouraging development: despite recent skepticism surrounding the enormous amount of money being invested in artificial intelligence, the largest participants in the AI ecosystem continue to indicate that demand seems to be accelerating rather than slowing.

A Weakening Labor Market Meets Improving Inflation

August began with another concerning employment report. July nonfarm payrolls showed a loss of 23,000 jobs compared with expectations for an increase of 83,000. Making matters worse, previously reported employment gains were revised substantially lower. June payroll growth was revised from 57,000 to 20,000 jobs, while May was revised from 129,000 to just 63,000.

Interestingly, equity markets initially rallied following the report. Typically, we have seen evidence of a deteriorating labor market viewed negatively as it ordinarily correlates with recessionary concerns. However, investors interpreted the weakness as potentially reducing the likelihood that the Federal Reserve would need to raise interest rates further.

That creates an unusual dynamic for markets. Weaker economic data may provide temporary support to stocks by reducing interest-rate expectations, but there is a point at which deteriorating employment becomes a much larger concern, creating a messy situation. We continue to believe the weakening labor market warrants close attention, but for now, markets are focused on its effects on monetary policy.

However, inflation provided better news. The July Consumer Price Index, released August 12, showed an increase of 3.4% year-over-year (per U.S. Bureau of Labor Statistic), in line with expectations (as measured versus Dow Jones Estimates for the period) and slightly below June's 3.5% rate (per the U.S. Bureau of Labor Statistics report released on July 14). Producer prices were even more encouraging. PPI (“Producer Price Index”), released on August 13 from the U.S. Bureau of Labor Statistic, increased 4.7% versus expectations of 4.9% (measured versus Dow Jones Estimates for the period) and declined substantially from the previous month's 6.2% rate (per the U.S. Bureau of Labor Statistics report released on July 15).

While inflation rates remains above the Federal Reserve's 2% objective, the recent trend (which the Federal Reserve monitors) is encouraging.

AI Comes Roaring Back

One of August's biggest market stories was the recovery in AI-related stocks following their sharp July sell-off. Following what appeared to be excessive leverage that had accumulated in AI-related securities leading up to the end of June had seemingly been flushed from the market during July. With positioning considerably cleaner and valuations lower, institutional investors had an opportunity to rebuild exposure. More importantly, the fundamental AI story continued to strengthen.

Amazon, Google and Microsoft all reinforced that capital expenditures related to AI infrastructure remain substantial. Rather than signaling that the enormous AI buildout is nearing completion, the largest hyperscalers continue to indicate that additional computing capacity is necessary.

One of the central bearish arguments surrounding AI has been that technology companies are spending enormous amounts of money building AI infrastructure without sufficient evidence that those investments will ultimately generate an adequate return. August's earnings season provided evidence against that thesis.

Nvidia Says AI Has Reached an “Inflection Point”

Nvidia provided perhaps the strongest evidence yet when it reported earnings on August 26. The company exceeded expectations on both revenue and earnings, driven once again by extraordinary growth within its Data Center business. Nvidia also raised its revenue outlook.

But the most interesting part of the report may arguably have come during the earnings call. CEO Jensen Huang described AI as having reached an “inflection point.” We believe the significance of that statement goes beyond simply arguing that AI technology continues to improve. We interpret that Huang's broader point was that AI compute is increasingly producing useful and monetizable output.

We view it as it no longer a question of whether companies are willing to spend enormous amounts of money developing AI. The increasingly important question is whether those investments are creating sufficient economic value to justify another round of investment.

Nvidia believes they are. In turn management projected approximately 70% revenue growth for fiscal 2028. Companies rarely provide quantitative revenue expectations that far into the future, particularly in an industry historically characterized by rapidly changing demand. Nvidia's willingness to provide such an outlook suggests substantial visibility into customer commitments and future demand.

Taken together, the message from August's earnings season was difficult to ignore: the AI infrastructure cycle does not appear to be slowing. If anything, the evidence increasingly suggests we are transitioning from the initial infrastructure buildout toward an environment in which AI itself begins generating the economic returns necessary to support continued investment.

Interest Rates Remain the Other Side of the Equation

While AI provided a powerful tailwind for growth stocks, interest rates remained one of the market's largest risks. The 30-year Treasury yield climbed above 5.3% during August, reaching its highest level since 2004.

There are several forces contributing to the pressure. Inflation, while improving, remains elevated relative to historical norms. At the same time, the federal debt burden has continued to grow, leaving investors increasingly focused on how the government will finance future deficits. Additional Treasury issuance increases the supply of bonds that investors must absorb. Alternatively, more accommodative financing policies risk creating additional inflationary pressure. Either scenario can place upward pressure on longer-term yields, making the risk-reward in long-term treasuries seemingly unappealing.

Treasury Secretary Scott Bessent responded on August 19 by announcing increased Treasury purchases of longer-dated securities. While the effort should not necessarily be characterized as traditional quantitative easing, it appears designed in part to provide support to the long end of the Treasury market and reduce the magnitude of the yield curve's steepening. Such intervention may provide a near-term backstop. Ultimately, however, financial markets will need the underlying macroeconomic conditions (i.e. inflation and fiscal deficits) to improve.

Warsh Gives Investors a Glimpse Into the Fed's Thinking

Federal Reserve Chair Kevin Warsh's August 28 speech at the Jackson Hole Economic Policy Symposium became another major focus for investors. Since assuming leadership of the Fed, Warsh has intentionally reduced the central bank's reliance on forward guidance. While that approach may give policymakers greater flexibility, it has also made it considerably more difficult for markets to anticipate future monetary policy. Markets can digest a lot of things but uncertainty is not one of them

At Jackson Hole, Warsh provided somewhat greater insight. He reiterated the Federal Reserve's commitment to price stability, maintained that 2% remains the appropriate inflation target, and emphasized the Fed's willingness to act aggressively if inflation fails to normalize.

While markets initially welcomed the additional transparency, the implications were less comforting. Following the speech, Fed Funds Futures increased the implied probability of a September interest-rate hike from approximately 35% to 55% (data based on CME’s September 2026 Fed Funds Futures as of 8/28/2026). That sets up what could be an unusually important September FOMC meeting.

The Consumer Is Still Hanging In

August also provided an important update on the health of the U.S. consumer through earnings from Walmart and Target.

Target exceeded expectations and raised its full-year sales growth outlook from 4% to 5%. Its earnings received a significant benefit from approximately $1 billion in tariff refunds, but the underlying consumer data were nevertheless encouraging.

Walmart similarly exceeded revenue and earnings expectations and also raised its annual revenue growth forecast from 4% to 5%. Comparable-sales growth fell short of expectations, however, and management noted that higher gasoline prices were beginning to affect consumer spending.

The takeaway from both reports is relatively straightforward: the consumer remains resilient, but signs of pressure are beginning to emerge. That will become increasingly important if weakness in the labor market continues.

Iran Remains the Wild Card

Further complicating the inflation outlook is the ongoing conflict between the United States and Iran. The two countries appeared to reach a standstill during August, with little indication that either side was prepared to resume meaningful peace negotiations. The United States reimposed its blockade of Iranian oil exports, while Iran continued to maintain that the Strait of Hormuz was closed, despite indications that maritime traffic continued to pass through the region.

The lack of visibility is itself problematic. A renewed disruption to global energy supplies could quickly place upward pressure on oil prices and inflation, complicating the Federal Reserve's policy decisions at precisely the time inflation otherwise appears to be moderating.

For now, markets appear willing to look through much of that uncertainty. We believe the situation warrants continued monitoring.

Looking Ahead: September Could Be Volatile

August ultimately provided investors with reasons for both optimism and caution.

The AI trade rebounded sharply, and corporate earnings strengthened the fundamental case for continued AI infrastructure investment. Nvidia's results and unusually long-range outlook were particularly notable, suggesting that demand remains visible well beyond the next several quarters.

Inflation also continued moving in the right direction, yet the macroeconomic picture remains far from settled. Employment is weakening, long-term Treasury yields remain elevated, and the Iran conflict continues to threaten energy market. As such, the Federal Reserve must determine whether persistent inflation warrants another rate increase despite growing signs of weakness elsewhere in the economy.

That combination could make September an especially volatile month, particularly as investors approach the next FOMC meeting on September 15.

For now, we believe the environment continues to favor selectivity. We believe the strongest secular growth opportunities (particularly within the AI ecosystem) remain compelling, but elevated rates and macroeconomic uncertainty make disciplined portfolio construction and active risk management increasingly important.

August reminded investors of an important lesson: volatility can change prices much faster than it changes fundamentals. The challenge is distinguishing between the two.

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