Weekly Investment Update (08/14/2026)

The investment backdrop continues to look more constructive than some headlines might suggest. July inflation was broadly benign, with headline Consumer Price Index (CPI) rising just 0.1% and core inflation easing to 2.5% year-over-year. That should give the Federal Reserve (Fed) more room to remain patient even as growth stays firm. There are still crosscurrents: July retail sales were weaker than expected, long-term interest rates remain elevated, and the situation with Iran and the Strait of Hormuz continues to carry both energy and geopolitical risk. But so far, these pressures look more like sources of volatility than evidence of a broader deterioration in the economic cycle.

More importantly for stocks, corporate fundamentals remain exceptionally strong. With more than 90% of the S&P 500 having reported, second-quarter earnings are up roughly 50% from a year ago. The strength has also broadened well beyond a handful of AI leaders, with 10 of 11 sectors producing positive earnings growth and estimates for both the third and fourth quarters continuing to move higher. That combination — cooling inflation alongside unusually strong and increasingly broad earnings growth — is a much healthier foundation for markets than one dependent primarily on expanding valuations. Expectations are undeniably high, but  in our view, the fundamental case for maintaining a constructive equity stance remains intact.

July CPI Lowers the Likelihood of a September Rate Hike

What is happening: The July CPI report was broadly as expected, with headline inflation rising 0.1% month-over-month, and the core measure rising 0.2%. That left both headline and core inflation modestly lower year-over-year than the prior report, at 3.4% and 2.5%, respectively. Energy continued to provide some relief at the headline level, with gasoline prices falling 2.9% in July following a 9.5% decline in June. Both core goods and services rose in the month, with goods prices reversing two consecutive months of declines. 

Core goods strength partly reflected computer hardware prices increasing 3.5% in July, in part due to recent Apple product price increases related to memory chip supply constraints amid broad AI-driven demand. Goods prices, excluding transportation, were stronger than in recent months but remained well below peaks, suggesting broad-based tariff pressures have largely faded. Ongoing tariff rebates may help quell price pressures going forward. 

Services prices rose 0.2% in the month, with shelter prices held down by a 2.8% decline in hotel prices, likely reflecting giveback from World-Cup-related demand. Rental prices remained consistent with their pre-pandemic pace, while real-time market indicators continue to suggest further disinflation ahead. 

Why it matters: After the July jobs report lowered September rate hike pricing to a coin flip, the July CPI data have shifted odds of a hike down to roughly 30% from a peak of 72%. In particular, the CPI report is consistent with a modest 0.2% month-over-month rise in the core Personal Consumption Expenditures (PCE) price index the Fed’s preferred inflation gauge. That would further confirm that inflation is on a path back toward 2%. With Fed policy remaining data dependent, the August data released in early September will likely be decisive for the September meeting. But barring major upside surprises in either report, the Fed is likely to hold interest rates steady, in our view. 

Moreover, we expect rate hikes to remain priced by the market, limiting the potential equity market impact. Besides labor market and inflation data, the Fed and markets are also watching Q3 real GDP growth tracking. The Atlanta Fed Nowcast is currently tracking 4.3%, well above trend. The strength partly reflects inventory stocking and a swing in net exports, which markets tend to look through. However, a report that reflects another strong quarter for consumer spending as well as business investment is likely to keep rate hike expectations well priced, with markets currently pricing in a 25-basis-point hike by January. We expect consumer spending to moderate, as the World Cup and OBBBA tax relief temporarily boosted spending patterns in Q2, but maintain a solid trajectory on the back of record-low job cuts, sticky wage growth, and fading inflationary pressures. The resilient growth backdrop should keep expectations for further rate hikes priced in while continuing to support equity markets. 

Remarkable Earnings Strength Supports Equities as Full-Year Expectations Continue to Rise

What is happening: The Q2 2026 earnings season has now largely concluded, with over 90% of companies having reported. Earnings growth was exceptional: up 50% from the year-ago quarter. Of the companies that have reported to date, 87% reported a positive earnings surprise for an aggregate earnings figure that is 29% above market expectations. Both are well above longer-term averages (on average, 76% of companies have exceeded expectations over the past decade; the aggregate surprise averaged 7.4%). 

The contribution of two non-operating items should be acknowledged. Alphabet and Amazon reported $150 billion (pretax) unrealized gains on equity holdings. Alphabet’s $98 billion gain was largely attributed to its position in SpaceX, which went public during the quarter at a premium to its pre-IPO valuation. Amazon’s $53 billion gain was driven by its investment in Anthropic, which raised capital during the quarter at a substantial premium to its prior valuation. While these gains were meaningful drivers of EPS growth for both companies (+294% for Alphabet and +242% for Amazon), their results were also solid at the operating-income level, which excludes these gains. Alphabet’s operating income was up 30%; Amazon’s was up 43%. 

Even excluding these gains, EPS growth for the overall index was still remarkable: an estimated 28% year-over-year. This figure is in the top decile of the past 20 years and is especially noteworthy given a healthy macroeconomic backdrop (similar or higher earnings growth rates are typically experienced during recoveries from recessions). Q2 2026 marks the second consecutive quarter of earnings growth above 25%, and the index has now notched double-digit earnings growth in eight of the last nine quarters.

While stocks tied to the artificial intelligence theme across the value chain were a meaningful contributor to these results, gains were broad across sectors, signaling a more durable strengthening of fundamentals. Ten of 11 sectors reported positive earnings growth (healthcare was the one exception, although more than 80% of its constituents saw positive earnings growth).

As the quarter comes to a close, the market’s attention turns to the second half of the year. Earnings estimates for both the third and fourth quarters of 2026 have been revised upward over the course of the year; the market is currently expecting over 20% year-over-year growth in each quarter. Growth is expected to continue to be broad-based across sectors. 

Why it matters: In representative model portfolios and certain discretionary strategies, our current equity overweight is driven in large part by a constructive view on earnings. We have previously noted that strong equity market performance this year has been the result of earnings growth, rather than expanding valuations, which is a more constructive upward path. Notably, the S&P 500 has returned 22% over the past 12 months, while the forward price-to-earnings ratio has fallen from 22.4x to 20.2x over that period. Overall, the strength and breadth of this earnings season are consistent with that positioning. 

Looking ahead, we believe equities remain well positioned, with continued strength in fundamentals supported by a healthy macroeconomic backdrop, although elevated expectations leave markets vulnerable to stock- or sector-specific pullbacks if results disappoint. The breadth of earnings across sectors enhances the durability of earnings growth, in our view. We acknowledge that market expectations for the rest of the year are high, with the potential for stock-specific pullbacks if earnings disappoint. Continued consumer resilience and AI-related investment should be important determinants of whether these expectations are met. We expect both factors to remain healthy, with AI investment supported by a strong backlog of demand (as noted in our July 31, 2026, update).