The S&P 500 Index returned +2.7% in August and set a new high. Five of the eleven S&P 500 sectors traded higher, with four outperforming the broad index. Energy (+7.0%) led all sectors, followed by Technology (+6.2%) as the sector rebounded from a July selloff and Materials (+6.0%) as gold gained nearly +10%. Utilities (-4.8%) led to the downside, followed by Industrials (-2.6%) and Real Estate (-1.9%). Under the surface, rotation continued across sectors, as investors shifted into beaten down large cap software stocks such as Microsoft, ServiceNow and Salesforce, driven by better than feared earnings and guidance, and movement away from the over-owned semiconductor and data center stocks. The S&P Equal Weight Index rose 2.0%, and growth outpaced value across market capitalizations.
Bonds traded higher despite Treasury yields rising throughout the month, with the U.S. Bond Aggregate returning +0.4%. Investment-grade corporate bonds modestly outperformed with a +0.5% total return, while high-yield gained +1.0%.
International stocks traded higher in August. Developed markets gained +2.0% and underperformed the S&P 500, while emerging markets returned +3.4% and outperformed as international tech stocks rebounded alongside U.S. tech stocks.
The dollar index fell 0.5%. The commodities complex rose 6.1%, with energy prices rising 5.9%. Brent prices rose 0.4% to $90/bbl. US natural gas prices rose 6.8% while European gas prices jumped 19.3% based on low inventories and continued supply uncertainty due to the Iran war. Gold rose 9.7% to $4,437/oz; silver rose 15.6% to $67/oz. Bitcoin jumped 25.4% in August to $78,854.
Stocks Set New Highs Despite Interest Rates Rising Throughout the Month
Equity markets traded higher in August, with strength extending across most broad stock market indexes. The S&P 500, Dow Jones, Russell 2000, and equal-weight S&P 500 all set new all-time highs during the month, and the Nasdaq 100 approached its all-time high from June. Despite headwinds from rising bond yields and volatile oil prices, the strong earnings season and rising global manufacturing and services PMIs provided tailwinds. The breadth of records was notable because the indexes capture very different parts of the stock market, from mega-cap tech stocks to small-cap stocks and the average S&P 500 company. Market leadership has shifted multiple times this year, alternating between periods of broad participation and concentration. August looked different, with strength spread across a wide range of companies and equity market segments.
The bond market offered a counterpoint to the strength in stocks. Treasury yields experienced broad upward pressure during August, with the 10-year yield climbing above 4.75%, the highest since January 2025, and the 30-year approaching 5.30%, its highest level since 2007. The rise in longer-term yields reflected several concerns, including persistent inflation, elevated government borrowing, and renewed uncertainty around energy prices.
Investment-grade fixed income asset classes had positive returns as rates were mixed across the curve. Municipals returned +0.2% (-0.6% YTD), the Bloomberg Aggregate Index returned +0.4% (-0.3% YTD), while investment-grade corporates returned +0.4% (-0.4% YTD). High yield bonds returned +1.0% (+2.7% YTD) as spreads compressed 18 bps, while leveraged loan returns returned +0.9% (+3.1% YTD). Emerging Market debt returned +0.8% (+4.3% YTD) even as the U.S. dollar fell 0.5% and spreads compressed 8bps.
Near the end of the month, Fed Chair Kevin Warsh’s Jackson Hole speech signaled that the Fed’s next move could be a rate hike rather than a rate cut, which put further upward pressure on Treasury yields. Despite the rate volatility, corporate credit spreads remained relatively calm and sit near record lows, suggesting investors are more concerned about the path of interest rates than companies’ ability to repay their debt.
Rates on the Move
The month was marked by rising bond yields globally, with multiple long-end rates in multiple countries breaching multi-year highs. In the U.S., rates rose at the short end of the curve as traders began to price in a rate increase after Fed Chair Warsh’s Jack Hole speech, which indicated that inflation was too high and financial conditions were not restrictive. 2-year rates rose 5bps to 4.34%; 10-year rates rose 2bps to 4.75%. The recession-watch 3M-10Y spread compressed 5bps to +91. The 2Y-10Y spread compressed 3bps to +41. Rates rose sharply in other developed markets. The spread between Italian and German 10Y bonds is 0.83%. 5-year breakeven inflation expectations rose 5bps to 2.33% (vs. recent high of 2.74% on May 4, 2026); 10-year breakeven inflation expectations rose 4bps to 2.32% (vs. recent high of 2.52 on May 4, 2026); the 10Y real yield fell 2bps to 2.43%. For 2026, markets now expect one to two rate hikes. At year-end 2026, the market expects the Fed Funds rate to be 3.99%.
Markets Learn to Live with Headline Volatility
Geopolitics have dominated headlines this year, but their impact has changed as the year progresses. Oil prices continue to move when Middle East developments alter the outlook for global energy supply. The difference is that investors appear less willing to treat each new headline as an economic shock. Earlier this year, the start of the conflict and disruption in the Strait of Hormuz caused oil prices to surge and contributed to a broad stock market selloff. Since then, investors have experienced several rounds of escalation and de-escalation. Oil still jumps on new developments, but markets are increasingly waiting for evidence that a headline will affect energy supply, inflation, and economic growth before reacting as dramatically as they did in March.