Market Update

Economic & Market Update | August 2026
Information current through August 15, 2026; month-end market returns through July 31, 2026

Overview
The U.S. economy remains resilient, but the expansion is becoming less even. Private demand and business activity were firm in the second quarter and July manufacturing accelerated, while employment and retail sales weakened. Consumer inflation improved, although producer-price pressure remained elevated. Markets were volatile in July, with technology and emerging markets retreating while financials, energy, and developed international equities held up better. The overall backdrop remains constructive, but slower hiring and above-target inflation warrant balance.

Economic Update
Real GDP grew at a 1.5% annualized rate in the second quarter, down from 2.1% in the first quarter. The headline understated the strength of private activity: real final sales to private domestic purchasers rose 3.9%. July's ISM Manufacturing PMI increased to 55.6, its strongest reading since May 2022, and the Services PMI remained expansionary at 54.1. Consumer momentum was softer, however, as July retail and food-services sales fell 0.6% from June, although they remained 5.0% above a year earlier.

Consumer inflation continued to moderate. CPI rose 0.1% in July and 3.4% from a year earlier, while core CPI rose 0.2% for the month and 2.5% over the year. Shelter increased only 0.1%, and energy declined 1.5%. Producer prices were mixed: headline PPI was unchanged in July, but the measure excluding food, energy, and trade services rose 0.4% and 4.7% year over year. June PCE inflation remained above target at 3.7% headline and 3.3% core.

The labor market weakened more visibly. Nonfarm payrolls declined by 23,000 in July, the unemployment rate held near 4.1%, and the prior two months were revised down by a combined 103,000 jobs. Payroll growth averaged only 34,000 over the past year. Wage growth slowed to 3.2% year over year, while labor-force participation remained low at 61.4%.

Federal Reserve
The Federal Reserve held the federal funds target range at 3.50% to 3.75% on July 29. Three voting members preferred a quarter-point increase, underscoring continued concern about inflation and supply-related price pressure. Softer employment and July inflation data support patience, but elevated PCE inflation and energy risk limit the case for near-term easing. The next meeting is September 15–16 and will include updated economic projections.

Market Update
July interrupted the second-quarter rally: the S&P 500 fell 0.2%, the Nasdaq Composite 3.4%, the Russell 2000 2.9%, and emerging markets 6.1%, while developed international equities gained 1.7%. Energy rose 12.2% and financials 6.2%, while information technology fell 3.8%. Risk appetite recovered in early August; the S&P 500 reached a record on August 13 and closed August 14 at 7,785.76, up 13.7% for the year on a price basis.

Higher yields pressured bonds: the Bloomberg U.S. Aggregate Bond Index returned -1.0% in July and -0.4% year to date. Corporate results were stronger than expected. With 88% of S&P 500 companies reporting, 86% beat earnings estimates and blended second-quarter earnings growth reached 50.4%; excluding unusually large contributions from Alphabet and Amazon, growth was still 32.0%. The forward price-to-earnings ratio was 20.0, above its 10-year average of 19.0.

Investment Perspective
The appropriate posture remains constructive but measured. Healthy private demand, stronger manufacturing, and robust earnings support equities, but weak hiring, softer consumption, and elevated valuations leave less room for error. Diversification across quality U.S. equities, international markets, and high-quality fixed income remains important. In bonds, current income is attractive, but duration and credit risk should be added selectively. Near-term attention will focus on the August 26 GDP and PCE releases, the September 4 employment report, the September 11 CPI report, and the September 15–16 Federal Reserve meeting.