August 2026 - Market Recap

Data Dashboard

Stock Market

The S&P 500 rose 2.7% in August, its first monthly gain since May. Technology drove most of it. The sector accounted for more than three-quarters of the index's gain, supported by a strong finish to earnings season. Early in the month, softer inflation readings and a weak July jobs report eased fears of a Fed rate hike, and the index set several record highs by mid-month. The second half was choppier, but the S&P still finished less than 1% below its peak.

Inside technology, leadership changed hands. Software companies had been sold off earlier this year on worries that AI would make their products obsolete. Their latest earnings made the opposite case. AI is starting to add to their sales, and the group rallied hard. Salesforce had its best month since 2005, and Palantir gained more than 50%. Chipmakers went the other way. They were up nearly 10% by mid-month, then gave most of it back, finishing roughly 1% higher.

Energy (+7.4%) led all sectors. Oil ended the month near $90 a barrel, and hopes for a quick return of Middle East supply faded: a ceasefire in the six-month U.S.-Iran conflict lapsed in mid-August, talks to reopen the Strait of Hormuz stalled, and U.S. forces struck Iranian positions over the month's final weekend. Health Care (+4.9%) drew money rotating out of chipmakers, with Eli Lilly and Merck among the leaders. Materials (+4.6%) rode gold's rally, and shares of miner Newmont rose about 35%. At the bottom, Utilities (-4.8%) fell the most. The sector tends to trade like a bond, and long-term Treasury yields sat near multi-year highs. Industrials (-2.6%) slipped as AI-linked equipment makers such as Caterpillar gave back part of their big run.

Second-quarter earnings season, which wrapped up in August, was one of the strongest in years. More than eight in ten S&P 500 companies beat estimates and profits grew about 50% from a year ago, the fastest pace since 2021. Large positive earnings reactions at Alphabet and Amazon inflated that number. Without them, growth was still around 32%. Nvidia revenue more than doubled and the company's guidance exceeded Wall Street's forecasts. Walmart was more cautious. Its U.S. sales growth was the slowest since 2020, and management said shoppers started making trade-offs once gas topped $4 a gallon. The stock fell about 9%.

August Return Summary (by GICS Sector)

Bond Market

The Fed didn't meet in August, but it still moved the bond market. Rates have held at 3.50%–3.75% all year, and three officials dissented in favor of a hike at the July meeting. On August 28, in his first Jackson Hole speech as Fed Chair, Kevin Warsh said inflation is still running above the 2% target. Unless the Fed is confident underlying inflation is moving toward that goal "clearly and at sufficient speed," he said, "we have work to do." Markets heard a warning. The 2-year Treasury yield, the one most tied to Fed expectations, posted one of its biggest one-day jumps of the year, and futures moved to price better-than-even odds of a September hike.

The 10-year Treasury yield finished at 4.75%, essentially unchanged for the month and near its highest level since early 2025. The path was bumpier. Long-term yields jumped in mid-August, with the 30-year touching its highest level since 2007, until the Treasury Department said it would double its buybacks of longer-dated bonds. That pulled yields back down. With rates roughly flat, returns came mostly from interest income: U.S. Aggregate Bonds gained 0.4% and Global Aggregate Bonds gained 0.5%.

High Yield bonds returned 1.0%, and the extra yield investors demand to own them over Treasuries narrowed to its lowest level in a year. With profits this strong, investors remain comfortable lending to companies.

Economic Dashboard

Economics

The economy is still growing, just more slowly. Second-quarter growth came in below the first quarter's pace, though revisions showed consumers spent more than first reported. Hiring softened: employers cut 23,000 jobs in July, and May and June were revised down by a combined 103,000. Even so, the unemployment rate dipped to 4.1%. Warsh described the labor market as being at full employment, so the Fed's attention is squarely on inflation.

We think of inflation as two stories right now. Energy is the hot one. Gasoline prices in July were up about 25% from a year earlier, and headline CPI stood at 3.4%. Strip out food and energy and core CPI is up 2.5%, down from 2.9% earlier this summer. The Fed's preferred gauge, core PCE, runs hotter at 3.3%, well above the 2% target. Bond markets expect relief: the 2-year breakeven, a market read on inflation over the next two years, stands at 2.37%. The Fed is less patient. Minutes from its July meeting showed several officials arguing that price pressures looked broad-based.

Households are feeling the squeeze. Retail sales fell 0.6% in July, the largest drop in more than a year, and consumer sentiment slid in August as pump prices rose. The 30-year mortgage rate ended August at 6.74%, up from 6.35% at the end of April. On a $400,000 loan, that difference adds about $100 to the monthly payment. Existing-home sales fell 2% in August to their slowest pace since June 2025, according to data released September 10, and builders started 12% fewer homes in July than in June. Prices are still rising, just slowly. The median existing home sold for $429,100 in August, up 1.6% from a year earlier. With more homes for sale than at any point since 2019, buyers are gaining room to negotiate.

The bond market has grown more uneasy since month-end. Most of the dip in yields that followed the Treasury's August buyback announcement had faded by August 31. On September 9, the Treasury announced a $6 billion buyback of 10- to 20-year bonds, triple the size of its earlier operations. In typical market conditions, this should put downward pressure on interest rates. Yields rose anyway. Some traders had been hoping for an even bigger number, and the next day the Treasury bought $5.2 billion of its $6 billion maximum. The 10-year yield still climbed to about 4.95% that day, its highest level since 2023. We don't read that as a good sign. When the government steps in this forcefully and rates still climb, the pressure is coming from forces buybacks can't fix. Oil back above $100, rising odds of a Fed hike, and heavy federal borrowing. Mortgage rates have already edged higher in September.

With Election Day on November 3, the midterm campaign has entered its final stretch. Republicans hold narrow majorities in both the House and Senate. Polling averages currently favor Democrats to win the House, while the Senate looks competitive. Affordability sits at the center of both parties' messages, with gas near $4 a gallon, up from under $3 in February. Congress did take one near-term risk off the table. A stopgap spending bill, passed September 1, funds the government through December 11, so there won't be a shutdown before the vote.

For investors, midterm years tend to be choppy, and stocks often tread water in the run-up to the vote. According to Charles Schwab, the S&P 500 has averaged a gain of just 1.7% from August through Election Day in midterm years since 1974. In the six months after the election, it has averaged 12.4% and risen every time. A split Congress has typically meant fewer sweeping policy changes but more standoffs over spending and the debt, which matters for a bond market already uneasy about federal borrowing. Over longer periods, markets have advanced under every mix of party control. Earnings, inflation, and interest rates have done more to drive returns than election results.

Portfolio Changes

In our Tactical ETF portfolio, we have increased US sector exposure, diversifying into Healthcare, Biotech, Financials and SmallCap stocks. For our Low Vol Tactical portfolio, amid volatile interest rates, we continue favoring floating rate & credit instruments.

The next few weeks hinge on the Fed, which meets September 15–16. Investors will be watching whether it raises rates for the first time since 2023 and what its updated projections say about the months ahead. Oil remains the wild card, since any progress or setback in reopening the Strait of Hormuz flows quickly into gas prices and inflation expectations. The August PCE report on September 30 will then show whether the Fed's preferred inflation gauge is still running above 3%. Stretches like this can feel unsettled, but a well-constructed portfolio is designed for them, and we're always glad to talk through what it means for your plan.

Thanks,

The Friedenthal Financial Team