Equity Rally Continues Supported by Strong Earnings and Easing Inflation: The S&P 500 gained 0.4% last week, reaching all-time highs and extending its year-to-date gain to 14.5%. Stocks in the energy, utilities, and consumer staples sectors led the index’s advance. Internationally, the MSCI Developed Markets and Emerging Markets indexes rose 0.6% and 2.7%, respectively, bringing their year-to-date gains to 14.8% and 22.7%.

S&P Earnings Growth Surpassed 50%: With the second-quarter earnings reporting season nearly complete, analysts tracked by I/B/E/S estimate that S&P 500 earnings per share (EPS) grew 51.6% year over year. All 11 sectors of the S&P 500 posted earnings growth, led by energy (+143%), communication services (+115%), consumer discretionary (+90%), and technology (+74%).

July Inflation Softens: July's Consumer Price Index (CPI), measured year-over-year, was 3.4%, slightly below June's 3.5%. Core CPI, which excludes food and energy, was 2.5%, down from 2.6% in June. Both measures were in line with Bloomberg median forecasts. Producer prices, as measured by the Producer Price Index (PPI), eased to 4.7% from 5.5%, while Core PPI declined to 4.2% from 4.9%. Bloomberg median forecasts were 4.9% and 4.1%, respectively.

Treasury Yields Edge Higher: Despite favorable inflation reports, longer-term interest rates edged higher. The yield on the 10-year U.S. Treasury note rose 0.04 percentage points for the week, settling at 4.69% on Friday. The Bloomberg Aggregate Bond Index slipped 0.1%, while the Bloomberg U.S. Municipal Bond Index gained 0.1%. Year-to-date returns for these indexes are -0.2% and 1.2%, respectively.

Retail Sales Dip in July: The Commerce Department reported that retail sales fell 0.6% in July, missing the Bloomberg median estimate of a 0.1% increase. Control group sales, which are used in GDP calculations, declined 0.4%, also below the median estimate of a 0.3% gain. The decline was heavily influenced by Amazon's decision to shift Prime Day to June to from July this year. This boosted June’s online sales but adversely impacted July’s sales. Excluding online sales, most retail categories posted gains.

Consumer Sentiment Slides: The preliminary August University of Michigan Consumer Sentiment Index slipped to 51.0 from 55.2 in July. The Bloomberg median forecast was 55.0. The weakness reflects survey participant’s rising concerns about inflation and the economic outlook. In recent years, however, the relationship between consumer sentiment and actual consumer spending has been relatively weak, largely reflecting the underlying strength of the labor market and broader economy.

S&P Earnings Estimates Climbing: Analysts tracked by I/B/E/S currently estimate calendaryear 2026 S&P 500 EPS growth of 34.0%, up from 27% at the beginning of last month. Estimated 2027 EPS growth is 13%. Although the S&P 500 appears expensive, trading at more than 21 times projected earnings versus a 25-year average of roughly 17 times, its earnings growth is exceptionally strong relative to its long-term average of about 8%. This should help sustain the market's upward momentum.

Value Building in Bonds: As of Friday, the yield on 10-year U.S. Treasury notes was 1.3 percentage points above July's CPI inflation rate, more than double the 25-year average spread of 0.6 percentage points. Economists surveyed by Bloomberg expect CPI inflation to decline to a median rate of 2.4% in 2027-2028 from an estimated 3.4% this year. If those forecasts prove accurate, investors who lock in current yields could earn real yield spreads of approximately 2.3%, a level not seen in nearly 20 years. While the path of inflation remains uncertain, several factors could support lower inflation over time, including a potential peace agreement in the Middle East, AI-driven productivity improvements, and the Federal Reserve's continued commitment to achieving its 2% inflation target.

Pulse Check on the Economy: S&P Global will release its preliminary August Composite Purchasing Managers' Index (PMI) on Friday. The index provides an early reading of business activity across the services and manufacturing sectors. The Bloomberg median estimate is 53.7, down from July's final reading of 54.5. Readings above 50 indicate expansionary economic conditions.

Roger Khlopin, CFA
Chief Investment Officer

Aaron Nghiem, CFA, CIMA
Senior Portfolio Manager