“
”Markets in Focus
Timely analysis of market moves and sectors of opportunity
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
Second-quarter earnings reports show that the bull market continues to rest on an exceptionally strong fundamental base.
Macroeconomic factors are returning to the driver’s seat, and Fed Chair Kevin Warsh has injected the potential for more volatility as investors wait for new data.
Although markets may be entering a choppier stretch, we view volatility as an opportunity if earnings expectations remain constructive.
Last week’s biggest catalysts — the NVIDIA earnings report and US Federal Reserve (Fed) Chair Kevin Warsh’s speech at the Jackson Hole Economic Policy Symposium — gave investors plenty to digest.3
NVIDIA delivered another impressive quarter, with revenue more than doubling from a year ago and management projecting strong revenue growth to fiscal 2028, which was a much-needed reminder that the artificial intelligence (AI) complex is underpinned by strength and durability. Second-quarter earnings season is effectively complete, and the bull market continues to rest on an exceptionally strong fundamental base.
After 97% of S&P 500 Index companies reported results:
Broader fundamental improvement helps explain why the market remains near its highs, even amid recent consolidation across parts of the AI complex.
But now that earnings season is over, macroeconomic factors will return to the driver’s seat.
Post-NVIDIA enthusiasm was dampened by Warsh’s distinctly hawkish tone on Friday. At Jackson Hole, he emphasized that financial conditions, labor markets, and the recent improvement in inflation have not materially raised the bar for the Fed’s plans. Markets responded accordingly: expectations for a September rate hike reached 60% and the yield curve’s front end repriced a more restrictive policy path.
Warsh clarified his view of the Fed’s reaction function by re-affirming the Fed’s 2% inflation target, as measured by the personal consumption expenditures (PCE) price index. A September rate hike is not a foregone conclusion, but Warsh has injected the potential for more volatility over the next two weeks as we wait for new data and the results of the next Federal Open Market Committee (FOMC) meeting.
Pricing for a September hike has essentially become a coin flip, putting unusual emphasis on this Friday’s August payrolls report and the following week’s consumer price index (CPI) data. The market will likely react to anything that meaningfully shifts the odds in either direction, which is not a constructive environment for large directional bets.
Instead, we believe that this is a time to remain invested, stay balanced, and let the data provide greater clarity. Seasonality reinforces the need for patience.
September is famously the weakest month for equities and the only month where they have historically finished lower more often than higher. But even if the Fed surprises with a September hike, equities could digest the initial policy shock and produce positive returns as economic expansion continues, which is what we have historically seen from the first hike of a mid-cycle tightening phase.
Although markets may be entering a choppier stretch, we view volatility as an opportunity if earnings expectations remain constructive. While the next few weeks may be better suited for patience than aggression, macro-driven weakness could create opportunities to selectively add risk and improve portfolio balance.
Our constructive longer-term view remains unchanged: We continue to favor durable secular growth and complementing that exposure across select sectors, geographies, and asset classes. Our current playbook is increasingly about patience and selectivity, using downside opportunistically instead of reaching for incremental risk at current levels.
Warsh's Jackson Hole speech triggered meaningful curve flattening
Yield curve spreads year to date
Source: Bloomberg, as of 8/28/2026.
Conditions are gradually becoming more constructive for a broadening in market leadership. Tech momentum positioning has reset materially, volatility has retraced toward late-May levels, and concentration risk has been reduced by improving breadth and resilient earnings. At the same time, increasingly violent factor rotations have reinforced the case for diversification.
We continue to see the most attractive long-term opportunities in AI capital expenditure (capex) beneficiaries that sit squarely within key bottlenecks, although they may still be recovering from the damage that was done in July. In the meantime, market leadership is broadening to include financials, health care, quality laggards, value cyclicals, and policy-driven assets. That’s why we are looking to improve portfolio balance and selectively add to areas of fundamental strength while waiting for cleaner opportunities to re-engage more aggressively with the AI trade.
Our idea of balance also includes international exposure, where we continue to like financial companies in the Eurozone periphery, but we are also looking at the recent momentum in EU defense and German industrial companies. Japanese banks and growth capex companies are another area of interest.
It will be a busy week for macroeconomic data. The ISM® Manufacturing PMI® Report and the U.S. Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS) will be released on Tuesday. The ADP® National Employment Report™ and Durable Goods Orders reports will come out on Wednesday. Thursday brings the initial jobless claims report and the ISM® Services PMI® Report. And in Friday’s nonfarm payroll report, economists expect July’s surprise contraction will be followed by a modest bounce back in employment.
Overseas, preliminary Consumer Price Index (CPI) data will be available for Europe. Information about China’s purchasing manager index (PMI), Japan’s industrial production, and Australia’s gross domestic product (GDP) will be the highlights for the Asia Pacific region. Japan has also scheduled 10- and 30-year government bond auctions. And the Reserve Bank of New Zealand is expected to hike its official cash rate by 25 basis points.
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 Aug. 28, 2026.
3 This is not a recommendation to purchase or sell the companies or investment products mentioned herein.
Risk Information:
M-995183 Exp. 12/31/2026
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
Fundamentals are still supportive of risk assets, with strong earnings and resilient economic growth continuing to outweigh the headwind from higher long-term interest rates.
While rising long-dated yields are focusing scrutiny on AI-related spending, healthy credit markets and strong hyperscaler balance sheets suggest the AI capital expenditure cycle remains intact.
Investors should consider broadening exposure beyond mega-cap technology to areas with accelerating earnings momentum, such as AI infrastructure, small caps, financials, industrials, health care, and Japan.
Risk assets faced modest pressure last week as longer-dated Treasury yields moved higher. However, the ongoing tug of war between bonds and equities has continued to favor a grind higher for the major indices.
Deteriorating US fiscal dynamics and lingering questions surrounding the US Federal Reserve’s credibility have kept pressure on the long end of the yield curve. This has created an unusual divergence with 2-year yields falling and 30-year yields rising since the July Federal Open Market Committee (FOMC) meeting.
The Fed’s annual Jackson Hole Economic Symposium may add some noise this week, but the more important signal remains the fundamental backdrop. Earnings results and guidance continue to impress across sectors and market capitalizations, while economic data has remained consistent with above-trend US growth. As a result, we favor remaining overweight to equities and being willing to lean into risk, particularly in the US, though there is little need to chase the market. Positioning has jumped higher off neutral levels, a pace of re-risking that leaves less dry powder for incremental buying and increases the likelihood of asymmetric reactions to a disappointment. NIVDIA earnings, the Fed’s Jackson Hole Economic Symposium, and a busy September macroeconomic calendar could all create near-term volatility as seasonal trends become less supportive.3 We believe any resulting weakness could be used opportunistically. Meanwhile, our playbook remains the same: Consider leaning into secular growth and improving small-cap fundamentals while broadening portfolios into areas where earnings trends are strong or inflecting higher, including financials, industrials, and select areas of health care. The path may be less orderly, but for now fundamentals still favor risk.
Long yields are breaking out
US 30-year Treasury yield and 200-day moving average
Source: Bloomberg, as of 8/21/2026.
One of the more important developments beneath the surface has been the continued rise of long-dated Treasury yields.
The pressure is coming from several directions simultaneously: worsening fiscal dynamics, sticky inflation, resilient growth, questions about Fed credibility, and a growing wave of hyperscaler issuance that adds to the overall duration supply. The US Treasury’s decision to increase long-end buybacks may help at the margin, but the amounts remain small relative to net issuance and are unlikely to change the broader supply-demand imbalance on their own.
More notable is how well credit continues to hold up despite the volatility in rates. Tight spreads suggest investors remain comfortable separating the disruption occurring within equities, particularly around artificial intelligence (AI), from underlying corporate creditworthiness. That distinction remains important to our asset-allocation view: We continue to favor equities over credit and credit over government bonds, where the combination of supply, fiscal concerns, and term-premium pressure has remained a meaningful headwind.
We frequently hear questions about the impact of rising longer-dated rates on the market, particularly the implications for the AI trade and the ability of hyperscalers to keep financing capital expenditures (capex). It’s encouraging that credit spreads have remained tight and that hyperscalers have continued to access the market in recent weeks with strong demand for new issuance. It’s worth noting that the largest hyperscalers still have remarkably strong balance sheets, so no impending financing crisis has emerged to slow capex.
That said, when the long bond is above 5% and the credit market is being asked to absorb hundreds of billions of dollars of new supply, capital clearly isn’t free anymore. The likely outcome is greater dispersion, and the market’s increasing scrutiny of hyperscalers continues to reinforce our focus on opportunities among the AI infrastructure and bottleneck beneficiaries. These remain relevant areas of opportunity, especially when we encounter air pockets like we experienced last week. At the end of the day, a 5%-plus long bond doesn’t suddenly turn good technology companies into bad businesses. But we believe it does make the distinction between current earnings and distant earnings much more important, placing greater emphasis on results, guidance, and investing in the strongest, most durable areas of secular growth.
Biotech lagged the market for years. Now it's on the verge of a breakout
Indices normalized to 100 on 1/1/2018
Source: Bloomberg, as of 8/21/2026.
Earnings remain the ultimate anchor, and earnings have been resilient. AI-related earnings remain powerful, but earnings momentum has been broadening into areas like financials, select areas of health care, small and mid-caps, and parts of the industrial economy. This emphasizes the case for balance — investors can own and be overweight to durable secular growth while complementing it with companies whose earnings are accelerating for completely different reasons. Here are a few themes that are top of mind right now:
AI capex. Rather than picking which application will be the winner, the most direct driver of accelerating earnings growth has been the continued hyperscaler capex. In short, follow where the trillions of dollars of committed spending are landing today. We continue to favor the beneficiaries of committed infrastructure spending: semiconductors, memory, networking, optics, electrical infrastructure, and power. Higher financing costs reinforce this framework. If the cost of capital continues to rise, investors should increasingly think about favoring exposure to companies benefiting from today’s buildout rather than those funding it, as the latter faces a higher burden of proof to the market. While higher longer-term rates present a risk, it remains something to monitor closely. Most hyperscalers still have unusually strong balance sheets, robust cash generation, and manageable debt burdens. Credit could become a first-order driver of the AI trade if spreads and new-issue concessions continue widening, investor demand weakens, and CFOs suddenly start talking about the cost of financing as a reason to moderate the cadence of capex. But that is far from the case today.
Small caps. While the Russell 2000® Index underperformed last week, it is only 1.65% below its all-time high, remains up 22.61% year to date, and is nearly 10% ahead of the S&P 500 Index. Higher interest rates also pose a risk, but as we have highlighted before, the strong performance for small caps over the past few months comes despite this asset class being the most negatively correlated US index to rates in a rising rate regime. We continue to favor biotechnology — see our latest Thematic Insights for more on our thesis. With the yield curve steepening, regional banks have remained attractive despite strong performance this year. AI infrastructure stocks are also trying to rebound and may offer selective dip-buying opportunities.
International diversification — think Japan. Last quarter, the Nikkei 225 Index surged over 50% year over year. Recurring profits at Nikkei 225 constituents grew a robust 53.7% year over year in the latest quarter. Growth has been primarily driven by: 1) expanding AI-related demand; 2) continued improvement in the financial sector; 3) enhanced export profitability due to the depreciation of the yen; and 4) positive inventory valuation effects and time lags in the resources and chemicals sectors resulting from higher crude oil and petrochemical prices. Of the 197 stocks that announced full-year profit plans, 63 raised their outlooks, resulting in an aggregate upward revision of approximately 6% compared to previous guidance. We continue to expect resilient profitability in Japan, and we believe that as the yen starts to find footing, that may provide an additional tailwind for international investors.
This busy week features three key events, starting with key earnings reports from NVIDIA and several other cyber and technology companies. There will be a strong read-through from the guidance we receive from NVIDIA founder and CEO Jensen Huang, not only on the company but also on the state of the AI buildout.
Later this week, Federal Reserve Chairman Kevin Warsh will deliver a keynote speech at the Jackson Hole Economic Symposium. Traders have trimmed bets on interest rate hikes by the Fed since the July FOMC press conference, and so they will look for validation in his remarks.
Finally, the week’s economic data includes the Fed’s favorite inflation measure — the core Personal Consumption Expenditures (PCE) Price Index — as well as revised gross domestic product (GDP) data from the US Bureau of Economic Analysis, and preliminary benchmark payrolls revisions.
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 Aug. 21, 2026.
3 This is not a recommendation to purchase or sell the companies or investment products mentioned herein.
Risk Information:
M-992279 Exp. 12/24/2026
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
We believe equities remain biased higher, supported by neutral positioning, low volatility, corporate buybacks, and resilient economic growth.
Strong earnings and improving market breadth reinforce the bull case, with technology, memory, cybersecurity, and small caps being attractive potential opportunities.
Contained inflation and easing yield pressures support risk assets in the near term, though tougher historic trends for September and October warrant caution.
We believe the path of least resistance for equities remains higher as the barriers to a stronger rally have continued to fall.
With positioning across US equities, including semiconductors, back to near neutral and earnings season largely behind us, macroeconomic data should increasingly drive price discovery. August has historically been a constructive month for US equities. With few major catalysts immediately ahead, that backdrop should keep the market biased higher into NVIDIA earnings on Aug. 26.3 Volatility-targeting strategies are emerging as marginal buyers with very low realized volatility, while corporate repurchases are running near $30 billion per week, providing further support to the market.
Beyond that, however, the setup becomes less forgiving. September and October historically have been more challenging, and a potential Anthropic initial public offering (IPO) in October could create another natural inflection point in a midterm election year.3
We continue to favor leaning into growth on this rally and are increasingly confident that the recent momentum unwind has largely run its course. Softer inflation and labor-market data should keep a lid on yields for now, a backdrop that favors technology and secular growth over cyclical value. Last week’s 13F filings from institutional investment managers similarly point to their renewed appetite for technology, with financials a notable secondary beneficiary. This is still not a market that investors need to chase. But with the fundamental backdrop intact and the near-term technical setup improving, we believe in continuing to use bouts of weakness to redeploy cash and rotate back toward the growthier bottleneck winners across the market.
Last week’s inflation and retail sales data reinforced our view that the US Federal Reserve (Fed) can remain on hold.
Consumer Price Index (CPI) and Producer Price Index (PPI) data continued to suggest that inflation pressures are more contained than many feared, even if progress back toward the Fed’s inflation target remains slower than ideal. There was no smoking gun in the data to justify a September interest rate hike, and our base case remains that the Fed does not raise rates again this year. We also think peak Fed hawkishness is likely behind us. The market had recently priced more than two additional hikes, while systematic positioning remains quite short across the Treasury curve, leaving room for yields to move somewhat lower as that positioning normalizes.
With no more major economic data scheduled for the remainder of August, NVIDIA earnings stand out as the next major catalyst. In the meantime, we remain constructive on the global growth backdrop. The US economy is expected to grow more than 8% nominally in the third quarter, an environment that continues to support a pro-risk stance for now.
The fundamental support beneath this market remains difficult to ignore. With more than 90% of S&P 500 Index companies having reported, FactSet puts blended second-quarter earnings growth at over 50%, the strongest pace since the second quarter of 2021. Growth, excluding one-time gains at Alphabet and Amazon, is still a robust 32%.3 Earnings strength has helped support the market through last month’s correction and improve the internals enough for us to take a somewhat more aggressive posture. The S&P 500 Index has now surpassed our 7,750 year-end target, which we have held steady all year. While we will update that target this week, we remain optimistic that the index can trade above 8,000 before year-end.
Oversold momentum conditions are leading to a rebound in high-beta technology while cyclical leadership continues to broaden — all supported at the fundamental level by strong earnings. We continue to favor cyclical exposure but would put marginal capital to work in growthier areas as they recover. Energy, metals and mining, and private equity within financials look constructive, while computer memory firms remain attractive and cybersecurity has continued to stand out within AI. Healthcare and industrials have also acted well. Internationally, the MSCI EAFE (Europe, Australasia, and the Far East) Net Index’s breakout is encouraging, with Japan still among the stronger markets, Europe improving, and EAFE industrials looking particularly interesting. The message remains the same: Earnings have continued to validate the bull market, while improving breadth has created more ways to participate.
Volatility is eerily low
Equity and rate volatility year to date
Source: Bloomberg, as of 8/14/2026.
The setup is becoming incrementally more constructive. The momentum unwind has materially cleaned up positioning across both fundamental and quantitative investors, while equities are once again rewarding strong earnings. Overall market volatility is at year-to-date lows when looking at the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), but single stock volatility remains elevated, particularly across momentum companies. We favor leaning into growth right now over cyclical value, with a particular focus on select exposures linked to agentic artificial intelligence (AI) adoption, as leadership broadens beyond data center bottlenecks toward applications, orchestration, and infrastructure beneficiaries. More specifically, our areas of focus include:
Compute scarcity and memory. AI demand appears increasingly constrained by compute availability, not model performance. The market remains focused on frontier large language models (LLMs) versus open-source competition, but graphics processing unit (GPU) availability and deployment capacity are increasingly becoming key bottlenecks. Compute rental demand continues to rise despite collapsing token costs. This suggests inference demand is growing faster than supply, despite more efficient models. Neocloud companies — cloud providers focused on AI and high-performance computing — are first-order beneficiaries of this trend, and this group looks even more attractive fundamentally after strong earnings results last week. We favor waiting for an opportunity to buy a dip rather than chasing this group. Memory stocks also remain an attractive catch-up trade in AI. The group has lagged broader AI winners partly because some investors reduced their positions in memory stocks to increase positions in GPUs, software, and infrastructure beneficiaries. Yet, memory sits at the heart of the AI stack, with high-bandwidth memory (HBM) and NAND memory chips remaining as key bottlenecks to scaling compute.
Small caps. We have favored small caps all year on the thesis that earnings would rebound, positioning was light, and relative valuations were very attractive. The Russell 2000® Index and the S&P SmallCap 600 Index are sitting at all-time highs while the Russell 2000 is quietly the best-performing US index year to date — up 24.6% vs. 19.4% for the Nasdaq-100® Index, 14.5% for the S&P 500, and 17.4% for the S&P 500® Equal Weight Index. This strong performance comes despite being the most negatively correlated US index to interest rates, in a rising rate regime. If economic data remains strong — and the Federal Reserve Bank of Atlanta’s GDPNow™ forecast of gross domestic product is at 5.8% — and the Fed doesn’t hike in September or October, this could create additional upside potential for the Russell 2000. We continue to like biotechnology and regional banks within small caps, though some of the AI infrastructure names are finally starting to rebound and offer selective dip-buying opportunities.
The economic data calendar is light, putting the focus largely on a busy calendar of retail earnings. In data, we get US industrial production and a raft of housing metrics. We also get the minutes from the Federal Reserve’s July policy meeting on Wednesday. Investors will be keen to see how close they were to raising interest rates. S&P Global Purchasing Managers’ Index reports are also due on Friday where we’re likely to see the US remain resilient while Europe and the UK are likely to see some moderation.
Outside of the US, it will be a busier week, with inflation data expected from Canada, the United Kingdom, and Japan as well as the German Zentrum für Europäische Wirtschaftsforschung (ZEW) survey, which will garner some attention in Europe. Chinese retail sales and industrial production round out the focus in Asia.
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.
Risk Information:
M-988689 Exp. 12/17/2026
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
Markets have historically seen seasonal headwinds through Labor Day, but the current technical backdrop is supported by reaccelerating corporate buybacks and incremental flows biased toward the upside.
One of the most immediate sources of risk remains the interest-rate backdrop: This week’s consumer price index (CPI) report will be particularly important for the near-term direction of rates and risk assets.
We remain optimistic and continue to believe that dips are buyable, but we’re also focused on finding opportunities to complement higher beta exposures with allocations across various sectors, industries, geographies, and market capitalizations.
Don’t underestimate the fundamental strength of this market. We have remained optimistic throughout this year’s volatility, consistently encouraging investors to use downside opportunistically and build exposure to durable secular growth themes. The nascent rebound across semiconductors and other artificial intelligence (AI) capital expenditure (capex) beneficiaries reinforces that message.
As the spending backdrop continues to move in the right direction, we view elevated dispersion as a healthy sign of increasing discernment among investors — it puts an even greater premium on fundamentals and selectivity. And right now, the fundamentals are difficult to argue with. Blended S&P 500 Index earnings per share (EPS) growth sits at 50.4%, supported by strong revenue growth and record-high margins. The index is tracking toward its largest earnings surprise since FactSet began tracking the metric in 2008.
The strength has also been broad across sectors, which reinforces our view that investors should complement their AI and secular growth exposure with opportunities in cyclical stocks while continuing to look across geographies and market capitalizations for additional sources of growth.
However, the path higher may not be linear. The S&P 500 Index has rallied more than 6% from its July 27 low in a very short period of time. Some consolidation or chop would be healthy as investors receive important inflation data during a lighter earnings calendar. And positioning across both the broader market and semiconductor complex is relatively neutral, which means the next leg higher will have to be earned.
But barring a renewed move higher in longer-dated yields, we continue to view dips as buyable. With earnings this strong, we would continue leaning into the fundamentals rather than fading them. The path of least resistance still looks higher, even if the gains are likely to remain relatively gradual at the index level while mega-cap companies do much of the heavy lifting.
Friday’s Employment Situation Summary, issued by the US Bureau of Labor Statistics, showed nonfarm payroll employment declining by 23,000 jobs and offered plenty for both sides of the Federal Open Market Committee (FOMC) argument: hawks can point to the decline in unemployment while doves will focus on softer wage growth and labor demand.
The more important takeaway is that Wednesday’s Consumer Price Index (CPI) report for July now carries even greater weight for investors who are expecting US equities to maintain their inverse correlation with yields and macro surprises.
The payroll data bought the US Federal Reserve (Fed) some breathing room by satisfying bond vigilantes, the fixed-income investors who allegedly sell a government’s bonds to enforce fiscal or monetary policy discipline when they disagree with its policy decisions. Meanwhile, anticipation of renewed progress around a deal over the Strait of Hormuz helped push both oil and bond yields lower, triggering a meaningful bout of institutional short-covering.
We do not view this as evidence that investors are suddenly putting on large, new risk positions. At this point in the summer, there have historically been seasonal headwinds through Labor Day. Positioning remains far from stretched, and the technical backdrop is becoming more supportive: corporate buybacks are beginning to reaccelerate, an exchange-traded fund (ETF) that tracks the Nasdaq-100 index saw $9.8 billion of inflows over the past week, and systematic strategies remain skewed toward buying — even when market growth is flat — which could add substantially if realized volatility stays low.
That leaves a market where investors are not overly extended and incremental flows remain biased toward the upside. The CPI report could certainly disrupt that setup, but we would continue to expect a slow grind higher if we don’t see another sharp move higher in yields. The largest secular growth companies could end up providing much of the index-level support.
The interest-rate backdrop remains one of the most immediate sources of risk. At the July FOMC meeting, Fed Chair Kevin Warsh continued his shift away from forward guidance, and markets quickly responded by questioning the credibility of the central bank. Those concerns have faded somewhat, but we don’t think the Treasury market is completely out of the woods. Investors still need to see continued progress on inflation, and if upcoming releases fail to confirm that price pressures have peaked, there is a real risk that selling pressure could drive longer-dated yields higher and force the Fed to act.
We would prefer to see additional confirmation on inflation before aggressively extending duration, although our broader framework has not changed: a 10-year Treasury yield moving toward 5% would present a more attractive opportunity for adding duration. Until then, the path of inflation and the bond market’s reaction remain some of the most important variables to watch.
Weaker economic data could help relieve upward pressure on yields
Economic surprises versus 10-year US Treasury yield
Source: Bloomberg, as of 8/7/2026.
As earnings season slows markedly, the market will largely be responding to economic and macro updates. Without any negative surprises, this sets the stage for a slower grind higher. We remain optimistic and continue to believe that dips are buyable, but we’re also focused on finding opportunities to complement higher beta exposures with allocations across various sectors, industries, geographies, and market capitalizations.
The very low level of realized correlation across most equity indices is also worth watching. The S&P 500 Index has enjoyed extremely low correlation and high dispersion, which has kept realized index volatility low despite the high amplitude of single-stock returns. An adverse macro event or the return of bond vigilantes could disrupt this status quo.
Look to own a broadening capex trade. We see three drivers for structurally higher capex outside of AI. First, high profit margins deliver the cash to invest in capacity. Second, a push for energy security involves heavy industry building out the electrical grid. Third, companies shortening their supply chains will boost local factories and logistics firms. Commercial and industrial loan growth is accelerating outside of the AI trade, which supports being overweight to the industrial companies and banks involved.
Select opportunities overseas. We believe that many international markets offer a good value component for investors who are overweight in US growth companies. Japan remains our favored country due to broad-based earnings upgrades and the highest net share buyback yield. European banks also remain attractive, particularly along the periphery. In emerging markets, countries like Brazil offer a good mix of financials, energy, and materials exposure while markets like India still fit the “value” bucket for portfolios.
Could gold’s “lost summer” be coming to an end? Gold significantly outperformed macro fundamentals last week in a rally driven by ETF inflows, stronger futures positioning, and renewed retail participation, which all point to a meaningful improvement in market sentiment. Second-quarter data from the World Gold Council confirms that central banks remained the dominant source of structural demand, with record official purchases offsetting softer ETF buying. Overall, we think the flow situation is dramatically improved while the positioning level is still moderate, which suggests that further gains are likely.
Wednesday’s US CPI report will be the pivotal release, with producer price index (PPI) and retail sales data providing additional insights into the US economy. Europe will be focused on the breakdown of inflation data for Germany, France, Italy, and Spain to determine the extent of the energy shock. Information is also expected from the Bank of Japan, the Reserve Bank of Australia, and Norway’s Norges Bank.
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.
Risk Information:
M-985338 Exp. 12/10/2026
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
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.
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.
What's it going to take to slow the rise in rates?
US Treasury yield curve
Source: Bloomberg, as of 7/31/2026.
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 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.
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.
This earnings season has seen extreme revisions higher
Quarterly S&P 500 EPS revisions since the beginning of 2021 normalized to 100 on the last day of the quarter
Source: Bloomberg, as of 7/31/2026.
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.
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.
Risk Information:
M-981201 Exp. 12/3/2026
