Economic Cycle

The U.S. economy continued to expand, supported by relatively healthy private-sector demand. Business investment remained an important source of growth, driven in part by continued spending on AI infrastructure, while household income continued to grow and the labor market remained relatively stable. Consumer indicators were more mixed, with retail sales and consumer sentiment weakening in the latest readings.

Inflation remains stubbornly elevated, complicating the outlook for monetary policy. While some measures have moderated, the Federal Reserve’s preferred core inflation measure remained above its 2% target, and higher energy prices have added uncertainty to the near-term outlook. For now, continued capital investment and a stable labor market remain supportive of the expansion, even as persistent inflation and mixed consumer indicators complicate the outlook.

Equity Markets

U.S. equities continued to advance in August, with the S&P 500 reaching new highs during the month. Large cap stocks generally maintained their advantage over smaller companies, while international equities also moved higher, led by emerging markets.

Information Technology was an important contributor to U.S. market gains, with software stocks among the strongest performers. Several companies that had come under pressure earlier this year amid concerns that artificial intelligence could disrupt traditional software business models rebounded sharply as earnings helped ease some of those fears. Energy also performed strongly alongside higher oil prices. Outside the U.S., emerging markets benefited from strength across parts of Asia, where continued demand for semiconductors and other AI-related hardware supported export growth and equity markets in several technology-heavy economies.

Fixed Income Markets

Fixed income markets were mixed in August as investors navigated persistent inflation and volatility in Treasury yields. Longer-term yields moved higher at points during the month as elevated government borrowing, heavy corporate issuance tied in part to the AI and data center buildout, and rising global yields increased pressure on long-duration bonds. Those moves later reversed, leaving Treasury yields relatively unchanged for the month.

Against that backdrop, fixed income returns were generally modest, with income providing the primary source of return. High yield bonds outperformed as credit spreads tightened further, while investment grade spreads were roughly unchanged. Corporate fundamentals remain supportive, but historically tight spreads leave investors with relatively little additional compensation for taking credit risk, reinforcing the importance of selectivity.

Our Perspective

Equity markets remain near record highs, supported by resilient economic growth, healthy corporate earnings, and continued investment in AI. Beneath the surface, however, performance across individual companies and industries has become increasingly differentiated as investors assess which businesses stand to benefit from the AI buildout and which may face disruption.

We continue to believe this environment favors a balanced approach. AI represents a significant long-term investment opportunity, but the scale of recent investment and the concentration of market returns tied to the theme also create risks. Maintaining exposure to potential beneficiaries while remaining diversified across companies, sectors, and areas of the market less dependent on the AI investment cycle can provide a more durable foundation for long-term returns.

Monthly Recommendation

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Indicator Sources: Bureau of Economic Analysis (BEA) — Real GDP estimate & Core PCE (bea.gov / fred.stlouisfed.org) | Department of Labor (DOL) Jobless Claims (fred.stlouisfed.org) | Census Bureau Retail Sales (census.gov) | University of Michigan Surveys of Consumers (sca.isr.umich.edu) | ICE BofA High Yield Option-Adjusted Spread (OAS) (fred.stlouisfed.org).

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