Weekly Newsletter: August 17, 2026
The summer heat may be creating a few mirages on the horizon that are keeping investors going. The usual announcements from various AI-related companies indicate more spending and keep the virtuous circle going. Lower inflation data, coupled with slower retail sales, changed investors’ minds about a rate hike at the Fed’s next meeting in a month. The perpetual confidence that a resolution in the Iran war will eventually push energy prices lower has kept a lid on oil prices. This week, the Fed will release the minutes from its last meeting, which may provide some color on the potential for any rate changes this year. The three dissenters, and their commentary, will also be scrutinized to see what the possible trigger points may be for rate hikes. This week will also bring down the curtain on a record-breaking earnings season as retailers provide guidance on the overall health of the consumer. Due mainly to the dramatic spending on data centers, earnings growth from a year ago surpassed 20%. Margins also increased to all-time highs, driven in large part by tech companies. Today, those margins are north of 15%, well above the long-term average of just over 6%. The shift in the US economy from one dominated by manufacturing (which is relatively low margin) to technology (typically over 25%) has been the key driver in higher overall profits in the SP500. Textbooks would point out that margins are a “mean-reverting” part of profits as other companies would enter the business, pushing margins lower. The past 20 years have proven margin compression to be a mirage and forced many analysts to revisit their profit models.
The surprise of the week went to the inflation data. Both consumer and producer prices came in relatively low in light of the increase in oil prices during July. It changed investors’ views about a rate hike in September, from over a 50% chance to just above 30%. There have been a few comments in the past from Fed Chair Warsh about looking at the “trimmed mean” CPI data available from the Cleveland Fed as a better way to look at inflation, rather than the traditional personal consumption expenditures (PCE). The trimmed mean removes the biggest increases and decreases across all the various spending categories to get at a “better” underlying trend. Using that data, inflation ticked up by a full percentage point from June and remains “sticky” around 2.8% year over year. The inflation numbers, combined with wages, indicate a typical worker is about even with inflation after seeing pay increases well above inflation for the past two years. In an otherwise light week for economic data, the meeting minutes from the Fed’s last meeting may carry additional weight. Guidance from the Fed, especially Chair Warsh, has been very light, by design. So the comments within the minutes will get extra scrutiny in an attempt to tease out the likely direction of interest rates at their September meeting.
Interest rates in the market remain relatively stable. However, the 30-year bond is now yielding the most since 2001. At that time, the 30-year bond was temporarily retired as budget surpluses meant little need to issue the debt. That mirage was popped by 2005. Other debt auctions fared better as the government focused much of its issuance at the short-term (lower) maturity length. The various bond models that are more trend-following still point to higher rates, such as commodity prices, utility indices, and recent trends in yields, all point to higher rates in the near term.
The very good earnings season continues to boost stock prices. Earnings growth has been roughly in line with the growth in the SP500, keeping the price-to-earnings ratio relatively stable over the past two years in the low 20’s. There has been an interesting debate on Wall Street about earnings and valuations. Earnings have been growing due in large part to the spending by hyper-scalers and semiconductor companies. They have historically been very high-margin businesses, pushing up the overall margins of the SP500. This means that the markets can continue to rise as long as they continue to spend on data centers. The flipside is that their spending has shifted the makeup of earnings from “capital lite” to a more intensive capital structure of building/maintaining data centers. This is typically a much lower margin business that may not yet be captured in the earnings from these companies. IF the margins do compress and earnings growth slows due to the shift in earnings makeup, they should not command their historically higher-than-average earnings multiples. Another horizon to focus upon in the years ahead.
The Fed minutes will likely be the focus of the week, along with retail earnings. Retailers may help investors gain insight into whether spending is real or merely a mirage.
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.