Last Wednesday, Nvidia’s () earnings report came in much stronger than expected, confirming that the AI boom is still going strong. On Friday, Fed Chair Kevin Warsh was much more hawkish than expected in his speech. He acknowledged that remains above the Fed’s 2.0% target. Overall, as we expected, these two events didn’t move the markets much. The S&P 500 was up just 0.5% for the week. The fell 0.2bps last week, while the rose 11bps.
I. Bonds
In the federal funds futures market, the number of expected 25bps over the next 6 and 12 months rose slightly to 1.5 and 2.0 (chart). The CME Fed Tool showed that the odds of a September rate hike jumped from roughly 35%-40% to 55%-60% after Warsh spoke on Friday. Warsh still has a credibility problem. He has talked the talk about the need for the Fed to bring inflation down to its 2.0% target, but he has yet to walk the walk.
As noted above, the 10-year Treasury bond yield fell 0.2bps last week, while the 2-year Treasury yield rose 11bps (chart). So the yield curve flattened a bit. Despite all the commotion in the bond market since US Treasury Secretary Scott Bessent intervened with Japanese authorities to support the on July 31, the 10-year yield remains in our “normal-for-longer” range of 4.00%-5.00%.
Despite concerns about the surge in bond supply from hypersalers, spreads between corporate bond yields and the 10-year Treasury yield remain low (chart).
II. Stocks
The S&P 500 has been volatile this year (chart). The war in the Middle East during March depressed stock prices as oil prices soared (chart). Since then, the conflict’s de-escalation has lifted stock prices this spring. During the summer, stock prices have been relatively flat. The S&P 500 is back on track compared with its average performance from 2016 to 2025. If it remains on that track, it would end the year at 8,146. We are still targeting 8,400 for year-end 2026. We doubt that one or two Fed rate hikes will derail our target.
Despite the recent rally in the Magnificent-7 ETF (), it still lags the Impressive-493 ETF since the start of this year (chart). Investors are suffering from AI fatigue and are moving into the stocks of companies they understand, and that might benefit from AI
III. Earnings
S&P 500 forward earnings per share rose to yet another record high last week at $396.05 (chart). By definition, it will converge to match the analysts’ consensus 2027 earnings estimate by the end of this year, which is currently at a record high of $412.46. We think both will hit $415 by year-end, taking the S&P up to 8,400 (with a 20.2 forward P/E).
Forward earnings for the S&P 400 and S&P 600 have also been rising to record highs still (chart).
IV. Valuation & Sentiment
This year, the forward P/Es of the major stock market indexes have declined as actual and expected earnings rose faster than stock prices (chart).
Our two favorite bull-bear ratios remain relatively neutral (chart). These contrarian indicators aren’t providing strong buy or sell signals.
V. Commodities
In his speech on Friday, Warsh noted that commodity prices may be putting some upward pressure on inflation. Grain prices jumped last week on mounting concerns that Russia is disrupting grain exports from Ukraine (charts).
The fell $160 per ounce on Friday after Warsh’s hawkish speech that morning (chart). It is back down slightly below its 200-day moving average. We are still targeting $5,000 by the end of this year, reflecting our expectation that any price dips will be short-lived. That’s because we think several central banks would view dips as buying opportunities in their attempts to rebalance their international reserves away from the dollar and toward gold.