Key Takeaway
Stocks rebounded sharply, led by technology and renewed optimism around AI-related earnings.
Market participation broadened, with small- and mid-cap stocks joining the rally.
Softer employment data lowered expectations for further Fed tightening, pushing Treasury yields lower.
Easing Middle East tensions drove oil prices lower, helping reduce inflation concerns and support risk assets.
Next week's CPI report will be critical in determining whether the Fed can remain on hold.
Market Summary
U.S. stocks staged a powerful rebound during the first week of August, recovering from July's technology-driven weakness The breadth of the rally was particularly encouraging, as gains extended well beyond the largest technology companies.
Technology quickly reclaimed its position as the market's primary leadership group. The tech sector gained 7.2%, while semiconductor stocks surged 9.3% and software stocks rose 8.6%. The rebound reflected renewed confidence that corporate spending on artificial intelligence remains strong and that companies are beginning to demonstrate clearer paths toward monetizing those investments. Mega-cap growth stocks joined the rally, as well.
The rally was not limited to technology. Materials, consumer discretionary, and industrials all posted meaningful gains, while homebuilders benefited from falling Treasury yields. The simultaneous strength of large-cap growth, small-cap stocks, and mid-cap stocks suggests investors were broadly increasing risk exposure rather than simply rotating between a handful of mega-cap names.
The week's recovery was encouraging because it demonstrated the market's ability to absorb volatility without breaking its broader upward trend. Technology remains an important source of growth, but expanding participation across the market creates a healthier foundation for sustained gains.
The Economy
Economic data offered a mixed but generally constructive picture. Manufacturing activity accelerated meaningfully in July, with the ISM Manufacturing Index reaching its highest level since May 2022. Services activity also remained firmly in expansion territory, while business investment continued to show strength through higher orders for capital goods.
The labor market, however, provided the week's biggest surprise. July payroll growth was essentially flat, while previous months were revised significantly lower. At the same time, weekly initial jobless claims remained below 200,000, indicating that employers continue to be reluctant to cut workers even as hiring slows.
The combination suggests the economy is continuing to cool without showing clear signs of a recession. Consumer demand and business activity remain relatively healthy, but the labor market is losing some momentum. This represents an important balance; slower employment growth may reduce inflationary pressure while still leaving enough economic activity to support corporate earnings.
The Fed & Fixed Income
The week's employment report had a significant impact on interest-rate expectations. The absence of payroll growth and downward revisions to prior months caused investors to reduce expectations for another Federal Reserve rate increase. The probability of a September hike fell to 41.9% from 55.0% the previous day.
Treasury yields responded accordingly. The 2-year yield declined by 9 basis points for the week to 4.20%, while the 10-year yield fell 10 basis points to 4.65%. Lower yields provided a meaningful boost to growth stocks, homebuilders, and other areas of the market that are sensitive to borrowing costs.
The key question now is whether the softer labor market will be accompanied by continued improvement in inflation. If so, the Fed may have less reason to raise rates further. That makes the upcoming CPI report particularly important.
The fixed-income backdrop remains attractive. Yields remain meaningfully higher than they were for much of the past decade, providing more compelling income opportunities while also offering diversification against daily equity fluctuations.
Company News & Earnings
Earnings were a major driver of the week's rally, particularly across technology and AI-related companies. Investors rewarded companies that demonstrated strong demand and improving earnings prospects, helping reverse much of the semiconductor and software weakness experienced in July.
Palantir was one of the week's standout performers, surging nearly 30% after delivering exceptionally strong earnings. The result reinforced investor confidence in demand for enterprise AI and demonstrated that companies with tangible revenue growth tied to AI adoption continue to command strong investor interest.
The semiconductor sector also experienced a broad rebound. Marvell, Intel, and Sandisk were among the strongest performers as investors returned to the group following July's selloff. AMD initially rallied following its earnings report before experiencing some profit-taking, illustrating how quickly sentiment can shift when expectations are already elevated.
Outside technology, earnings from Caterpillar, Eli Lilly, and Amgen were also well received, contributing to strength in industrials and health care. Airbnb later posted a strong post-earnings reaction, while homebuilders benefited from both earnings momentum and lower interest rates.
The broader earnings takeaway is increasingly constructive, rewarding companies with strong fundamentals. Still, expectations remain high. The market is placing greater emphasis on forward guidance, profitability, and evidence that AI-related spending is translating into sustainable revenue and earnings growth.
Geopolitics
Geopolitical developments provided another important tailwind. Crude oil prices declined approximately 10% for the week after President Trump called off planned strikes against Iran and negotiations continued regarding reopening the Strait of Hormuz. The decline in oil prices helped ease concerns about a renewed inflationary shock.
Oil prices did experience periods of volatility following renewed attacks in the Red Sea, but investors increasingly viewed a prolonged disruption to global energy supplies as less likely. WTI ultimately finished the week near $78 per barrel, while the energy sector declined 3.3%, making it one of the week's weakest performers.
For investors, lower energy prices are particularly important because they can support consumer spending while reducing pressure on inflation. Continued progress toward a diplomatic resolution would therefore represent another positive development for the broader economic outlook.
Week Ahead
The primary focus next week will be the July Consumer Price Index (CPI) report. After the softer employment report reduced expectations for additional Fed tightening, investors will be looking for confirmation that inflation is also moving in the right direction. A continued moderation in price pressures would strengthen the case for the Fed to remain on hold.
Investors will also continue to digest second-quarter earnings, particularly results from technology and AI-related companies. The key question will be whether the strong earnings momentum seen during the past several weeks can continue to broaden across the market.
Overall, the week's combination of strong earnings, broader market participation, lower Treasury yields, and easing geopolitical concerns created a favorable environment for equities. While volatility is likely to remain, the recovery demonstrates that investors continue to view short-term weakness as an opportunity to reposition rather than a reason to abandon the longer-term market trend.
As always, please reach out to us for any questions and thank you for your trust.
Michael Neill, CFA
This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities. Any references to specific securities are not recommendations and should not be relied upon as investment advice.