August 3, 2026: Earnings strength meets restrictive rates

BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA^{1, 2}

Key takeaways

• We expect the markets’ tug-of-war between rising yields and rising earnings to define August. We remain constructive through year end, but the near-term path is likely to stay choppy.

• Key questions remain about the direction and durability of recent movements in both US Treasury yields and semiconductor returns.

• When seeking to improve portfolio balance, we continue to favor financials, health care and biotechnology, select “real economy” industrials, broad market exposure, and high-quality small- and mid-cap companies following stabilization in interest rates.

 

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August begins with markets running into resistance — literally and figuratively — and investors should watch closely whether they can push beyond that resistance.

US Treasury 2- and 10-year yields have surged back to levels we have viewed as likely ceilings, while the 30-year has already broken to its highest level since 2007. The shift is global, with yield curves in Europe and Japan also moving higher, and the repricing has become increasingly persistent since Kevin Warsh took over as chairman of the US Federal Reserve (Fed).

Last week’s Federal Open Market Committee (FOMC) meeting helped explain the move. The Fed held the federal funds rate at 3.50% to 3.75%, but three officials dissented in favor of a hike and Warsh again provided little forward guidance, leaving markets to tighten on the Fed’s behalf. We suspect he is comfortable with that outcome: Higher market yields can do some of the inflation-fighting work without forcing an immediate increase in the fed funds rate. The question is whether 2- and 10-year yields encounter resistance and stop rising or follow the 30-year higher.

 

A decisive breakout would challenge the technical view that yields would top around current levels. That kind of breakout also would raise the hurdle for valuations, financing conditions, and economic growth. For now, summer consolidation remains more likely than a fundamental breakdown, but this rate test matters.

The AI debate is moving

The same resistance is visible in technology. Despite a reversal rally, the PHLX Semiconductor Sector Index^® failed Friday at rising above a cluster of key technical levels, leaving the bears in control in the near term. Semiconductors remain substantially higher on the year, and July’s historic unwinding of momentum still looks more like a period of consolidation than a clean V-shaped reset. However, we remain optimistic because fundamentals have held up better than recent broad-market returns: Among the 61% of the S&P 500 Index that have reported, 86% have surpassed earnings per share (EPS) estimates. In addition, blended second-quarter earnings growth is running at 47.4%. That headline is inflated by unrealized gains on Amazon’s and Google’s stakes in Anthropic, but even with both companies excluded S&P 500 earnings are still growing 28.8%.³ Analysts also raised third-quarter estimates by 0.3% during July, compared with the first-month estimate cuts that typically occur.

The artificial intelligence (AI) debate has moved from demand to return on investment, not from growth to contraction. All the cloud computing services companies have reported, and the story remains one of accelerating growth still constrained by supply. We continue to favor exposure to genuine bottlenecks and platforms with clear monetization opportunities, but would prefer to wait for additional technical improvement before adding aggressively to semiconductor positions.

Navigating a market full of crosscurrents

The broader market has remained in better shape than the semiconductor complex, but it is due for further consolidation. The weekly S&P 500 and Russell 2000^® Index charts are digesting extraordinary second-quarter gains. The Russell 2000 has bounced from its recent lows, but it has yet to rise above technical levels that would reflect a more durable recovery.

Higher interest rates and higher energy prices also are beginning to show up in economically sensitive groups. Transportation stocks declined each day last week. Meanwhile, retail remained above its moving averages but its momentum appears to be at risk of stalling.

Separately, US intervention to support the yen lifted the currency roughly 4%. We do not expect an immediate unwinding of the yen carry trade given how far the currency had previously fallen, but the move adds a marginal source of selling pressure to assets financed with yen leverage. Combined with a potentially more persistent and wider Middle East conflict and the approach of the US midterm elections, these crosscurrents argue for a cautious – but not defensive – posture. Earnings and credit remain supportive. In our view, the market simply needs time to absorb a higher cost of capital and to work through volatile expectations.

 

Investment playbook

We expect the tug-of-war between rising yields and rising earnings to define August. We remain constructive through year end, but the near-term path is likely to stay choppy. Here are some of our high-level thoughts as look ahead:

• Respect the rate test. The 30-year yield has already broken higher; the next move in 2- and 10-year yields will be critical. If those yields fail to break through key resistance levels, small-cap stocks and other rate-sensitive parts of the broadening trade could benefit. Conversely, a breakout above those resistance levels would favor quality, current cash flow, and less-levered businesses while increasing the risks to speculative growth, retail, transportation, and housing-linked stocks. Banks can benefit from a steeper yield curve, but there is a point at which higher yields become a broader growth headwind.

• Semiconductors don’t have the all-clear. The recent liquidation in semiconductors has removed one known overhang, but the PHLX Semiconductor Sector Index has not confirmed a durable low. We would avoid chasing sharp rebounds until the index moves back above key technical resistance levels and relative strength begins to stabilize. That does not mean abandoning AI: Hyperscaler capital expenditures remain firm, backlogs are visible, and monetization is improving. It does mean becoming more selective and emphasizing scarcity, earnings visibility, and balance-sheet strength.

• Use consolidation to improve portfolio balance. July demonstrated the value of having multiple drivers of return. We continue to favor financials, health care and biotechnology, select “real economy” industrials, equal-weight exposure, and high-quality small- and mid-cap companies once rates stabilize. Preserve some dry powder and use volatility to add to durable earnings growth rather than reaching for indiscriminate beta.

What to watch

The ISM^® Manufacturing PMI^® Report on Monday and ISM^® Services PMI^® Report on Wednesday could show whether recent sentiment survey improvement is carrying into the third quarter.

The Job Openings and Labor Turnover Survey (JOLTS) arrives Tuesday, followed by Friday’s employment report, where consensus estimates expect approximately 80,000 payroll gains and the unemployment rate to rise to 4.3%. A solid but not tight report could support patience from the Fed, while a clearer reacceleration in hiring or wages could reinforce the upward pressure on yields.

 

¹ Matt Orton, CFA, is Chief Market Strategist at Raymond James Investment Management. Joey Del Guercio, CFA, is Research Analyst at Raymond James Investment Management.

² Unless otherwise indicated, all data cited is sourced from Bloomberg as of July 31, 2026.

³ This is not a recommendation to purchase or sell the companies or investment products mentioned herein.

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Definitions
ISM^® Manufacturing PMI^® Report — A report compiled by the Institute for Supply Management based on data compiled from purchasing and supply executives nationwide. Survey responses reflect the change, if any, in the current month compared to the previous month for new orders, backlog of orders, new export orders, imports, production, supplier deliveries, inventories, employment, and prices. A Manufacturing PMI® reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining.

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Indices
PHLX Semiconductor Sector Index^™ — A modified market capitalization-weighted index composed of companies primarily involved in the design, distribution, manufacture, and sale of semiconductors.

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M-981201 Exp. 12/3/2026

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