Weekly Newsletter: August 3, 2026
The summer heat is getting to everyone. The mirage of big-time profits from the huge capex spending (capex – buying/building “stuff”) remains in the ethereal future. Comments from Fed Chair Warsh, as usual, lacked specifics. The on-again, off-again peace process with Iran is beginning to wear thin. Finally, the economic data, which was supposed to show robust growth, came in well below estimates. Investors rode the wild rollercoaster during July, finishing pretty much where it started. The dog days of summer are just getting into full swing, and investors are looking for a bit of shade. Earnings from the big tech companies did show some earnings and revenue from the capex spending, but it was primarily from “cloud services” rather than anything tangible from AI. Earnings overall, led by tech, should show growth of 27% this year. Any stumble from this portion of the market could spell trouble for earnings that have been supporting higher stock prices. The economy grew at a meager 1.5% for the quarter, well below the 2% estimate. Personal spending remained strong as the consumer, counted out many times, remains ready, willing, and able to spend. The slower growth and higher inflation once again spurred talk of “stagflation”. Fed Chair Warsh reiterated the Fed’s goal of bringing inflation down to 2% but was short on specifics. As a result, interest rates for long-term maturities rose to a 19-year high. Investors are hoping for some cooling of overall conditions ahead of the next Fed meeting in mid-September.
Economic growth is a mixed bag, with AI spending pushing overall economic growth higher. Without that spending, the economy would have grown roughly 1%, vs. the reported 1.5%. All the spending is expected to provide labor-force gains in productivity, meaning the workforce is more efficient and does not add to inflation. Current productivity is estimated at 0.3% in the first quarter, well below the 3.3% gains achieved over 20 years ago. Second quarter productivity figures will be released this week. The labor force will be the focus as the monthly jobs report is due on Friday. Estimates of 80k+ and a stable unemployment rate should continue to calm fears of AI-induced job losses for another month. Wage gains are expected to keep pace with inflation, which in turn should keep the consumer in their spending ways. Inflation data will be sparse this week and implied in some of the surveys on manufacturing and services. As Chair Warsh reiterates their focus on inflation, every bit of inflation data will be scrutinized for evidence of slowing. Barring that, expect a rate increase at their next meeting in September.
The lack of guidance from Chair Warsh at the press conference following the Fed meeting resulted in a decline in prices on long-dated treasuries, pushing yields higher. In what has been a trend all month, interest rates in general have been gradually rising as energy prices have increased. While higher rates are not the solution to higher energy prices, economists will be looking through the data for evidence of oil-related inflation impacting a broader array of goods and services. Commodity prices, led by the jump in oil, are up over 20% from a year ago, but relatively stable over the last three months.
Tech earnings have been tremendous across the board. However, the “under the hood” look has been more of a mixed bag. Capital expenditures compared to cash flow remain a focus for investors. If cash flow is above capex, investors are OK, but when capex is above cash flow, it means companies will be raising capital (Issuing debt or shares) that could hurt current shareholders. Without a clear path to profitability on much of the spending, investors are left hoping that there is a pot of gold at the end of this particular rainbow. Companies “in the cloud” like Microsoft and Amazon have benefitted from the spending as more companies lease/rent space on their servers, while others spend to provide capacity. As long as earnings growth at tech firms remains very high, the markets can be supported. However, higher interest rates (and potentially oil prices) and mid-term elections are issues that could at least temporarily derail the market rally. For perspective, even with the rally in tech to end the week, it is down roughly 9% from early June, while the average stock, as measured by the equal weighted SP500 index, is up nearly 4% over the same period. Tech will drive the “averages” but not necessarily the average stock.
Still a full slate of earnings, but this should be the last big week as earnings season winds down. Unemployment will be watched closely but should not provide any big surprises.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.