Macro
Household spending rose more than expected in August, extending a three-month streak of solid gains and underscoring the resilience of U.S. consumers in the face of high borrowing costs and sticky inflation. The strength in personal outlays suggests that third-quarter growth is approaching 4%, following an upwardly revised second quarter that marked the fastest expansion in nearly two years.
August new-home sales climbed to their best level since early 2022, joined by firm existing-home sales. Core capital goods orders surprised to the upside, signalling ongoing business investment. Meanwhile, initial jobless claims retreated to their lowest since mid-July, highlighting continued labour-market stability. Inflation pressures also remained contained, with core PCE aligning with expectations, offering the Fed more confidence that price growth is trending toward its target.
Following the data, investors trimmed expectations for two full 25 bp rate cuts this year. The market narrative is shifting from one of imminent slowdown to one of resilient growth and selective easing. Within the Fed, views remain divided: new Governor Miran and Treasury Secretary Bessent advocated for a more aggressive pace of cuts, while others, including Chicago Fed’s Goolsbee, urged caution against front-loading policy moves amid ongoing tariff-related inflation risks. Chair Powell reiterated a measured, data-dependent stance, suggesting no clear majority yet for rapid easing.
There is an argument that the rate cuts help large corporations more, as they boost stocks and corporate bonds, improving financing conditions. But financial markets are already strong, offering limited incremental support from further easing. Small businesses, which rely on bank credit, remain more vulnerable to tight lending conditions. Credit availability depends not just on the price of money (interest rates), but also on the willingness and ability to lend. A rate cut lowers the cost of borrowing, but it has little impact on the borrower’s risk profile. Furthermore, small businesses depend on relationship banking, not bond markets. When local banks are acquired or consolidated, personalised lending shrinks. Finally, bank lending reacts more slowly and depends on credit standards.
Rates
Inflation is behaving, but not conquered. August core PCE ran 2.9% y/y and broadly in line with forecasts, reinforcing the sense that disinflation has stalled without re-accelerating.Long yields have eased from their early-September highs, with the 10-year near ~4.20% and the 30-year ~4.75–4.77%, as investors rediscovered the long end’s hedging value amid softer data and thinner supply.
Policy is still a debate, not a destination. Fed officials remain split between those arguing policy is already restrictive and those focused on finishing the job on inflation, while a fresh wrinkle emerged as Dallas Fed President Lorie Logan urged exploring a more representative short-rate target than fed funds for the operating framework. It’s not imminent, but it signals a willingness to modernise the plumbing.
Near-term risk is a data blackout. A U.S. government shutdown threatens to delay key releases (including payrolls), complicating the Fed’s “data-dependent” posture and potentially keeping markets anchored to private proxies and high-frequency signals.
With inflation steady but above target, and long bonds regaining their bid, the rates market will trade every incremental data point, if it arrives. A prolonged shutdown would raise the premium on caution, not conviction.
Credit
Primary markets just delivered a September for the record books. U.S. investment-grade supply has already surpassed prior September records and is tracking toward the ~$200bn mark, headlined by Oracle’s $18bn multi-tranche sale to fund AI-related capex, an offering that drew an order book approaching ~$88bn. High yield also posted a record September, with ~$49–51bn priced and the busiest week in five years.
The catch: spreads are tighter than historical averages, leaving less room for error and more payoff to security selection and structure (tenor, covenants, and collateral). Deal reception remains strong for high-quality issuers and clear AI beneficiaries, but recent concessions on some junk prints and isolated single-name blow-ups argue for active rotation (cyclicals → non-cyclicals where appropriate) and barbell expressions that pair carry with downside hedges. (These dynamics align with the month’s issuance and commentary captured across dealers and managers).
Credit is open and receptive, especially for marquee IG names. Still, the risk-adjusted edge now resides below the index, selecting credits, structures, and maturities that can withstand a slower glide path for policy and the possibility of a temporary U.S. data vacuum.
Equities
U.S. equities end the week lower with Dow (0.15%), S&P (0.31%), Nasdaq (0.65%), and Russell 2000 (0.59%). After setting a record high on Monday, the market declined, resulting in the weakest performance for the S&P 500 and NASDAQ since August. Despite short-term weakness, equities remain near record highs, driven by firm economic data, contained inflation, and ongoing enthusiasm for AI. The near-term path will depend on the resolution of the shutdown, the impact of tariffs, and clarity on Fed policy.
Selling pressure was broad-based, with weakness in the following sectors: airlines, life sciences, home furnishings, asset managers, apparel, pharmaceuticals/biotechnology, chemicals, and software. Popular retail-trading names and heavily shorted stocks underperformed. Within large-cap tech, performance was mixed: AMZN (-5.1%) and META (-4.6%) weighed, while AAPL (+4.1%) stood out on the upside.
Some sectors outperform, and Energy led the market with a +4.67% surge, followed by strong defensive participation from Utilities (+2.82%). Most other sectors posted smaller moves, with Real Estate edging +0.88%, while Technology and Industrials delivered modest advances.
AI remained a central theme. NVIDIA (+3.9%) rallied early after unveiling a $100B OpenAI datacenter investment, fueling debate about the self-reinforcing nature of AI spending. Reports from Bain & Co. and Harvard Business Review cautioned that compute demand may exceed infrastructure capacity and low-quality AI output (“workslop”) could limit near-term productivity gains.
The AI rally that began with the Magnificent Seven has steadily broadened, moving beyond the original mega-cap leaders to include firms like Broadcom, Oracle, and Palantir, which are positioned to benefit from accelerating demand for AI infrastructure, software, and analytics. This shift signals that more companies are now benefiting from the AI trend.
Even so, the Magnificent Seven remain a key driver of market performance. They represent nearly 35% of the S&P 500’s market cap, with earnings expected to rise 15% in 2026 on 13% revenue growth. The rest of the index is projected to deliver 13% EPS growth and 5.5% revenue gains, underscoring the group’s continued dominance despite growing competition.
To better capture the evolving AI opportunity, Wall Street strategists have introduced several variations on the original theme:
- Fab Four: Nvidia, Microsoft, Meta, Amazon – focused on core AI infrastructure, cloud, and platform growth.
- Big Six: Magnificent Seven minus Tesla – excluding Tesla due to its cyclical auto exposure.
- Elite 8: Magnificent Seven plus Broadcom – adding Broadcom as a key enabler in AI chips and networking.
These evolving groupings echo past market eras, from the Nifty Fifty to the FAANGs, each defining leadership in its time before giving way to new winners. The AI cycle appears to be following a similar path.