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Good Morning!
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Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
Stocks pulled off their first winning week in three, though it was a bumpy path to get there. The S&P 500 gained about 0.5% on the week, the Nasdaq rose 0.9%, and the Dow added 0.5%, recovering from the prior week's yield-driven selloff. Two forces drove the action: easing bond yields early on, and a make-or-break stretch of data and earnings midweek.
The week started on a positive note as long-term Treasury yields, which had spiked to multi-decade highs the week before, finally eased. The 10-year note dropped back toward 4.6% after news that the Treasury could tap its roughly $1 trillion cash account to help fund bond buybacks. That relief was a welcome tailwind for the rate-sensitive smaller companies our readers focus on, since falling yields ease borrowing costs across the board.
Then came the pivotal day. Wednesday packed the July reading of the Fed's preferred inflation gauge, a fresh look at second-quarter growth, and earnings from the market's most important AI chipmaker all into a single session. The inflation data was the key takeaway, and it was a mixed bag. Prices came in roughly in line with expectations, but the report showed that the recent progress on inflation has stalled, with the core annual rate stuck at 3.3%, still well above the Fed's 2% target. Notably, incomes rose while consumer spending stalled, a sign that households are becoming more cautious.
The AI chipmaker delivered again, beating expectations with revenue that more than doubled, and its shares jumped about 9% the next day. But here is the catch: the rest of the chip sector stayed weak, with a broad semiconductor gauge falling more than 3% on the week. So while the AI leader impressed, the enthusiasm did not spread, a reminder that the market is getting more selective within the AI trade.
The week's final act was the Fed's annual Jackson Hole symposium, and the message from the chair was notably cautious. He said the better inflation readings this summer did not convince him that underlying trends had meaningfully improved, effectively pushing back on hopes for near-term rate cuts. That knocked stocks lower on Friday, though it did not erase the week's gains.
The bottom line: easing yields and a strong report from the AI leader carried stocks to a winning week, but stalled inflation and a hawkish Fed message capped the gains. For small caps, the drop in yields was a genuine positive, but the path to the rate cuts they would benefit from just got murkier.
What's Coming Next Week
Everything points to Friday's August jobs report. It is the single most important data point on the calendar, because July delivered a shocking outright decline in payrolls, and this report will reveal whether that was a one-time blip or the start of a real hiring slowdown. The answer will heavily shape the Fed's decision at its September meeting. A weak report would strengthen the case for a rate cut, which would be a meaningful lift for rate-sensitive smaller companies, while a strong one would validate the Fed's patience and its reluctance to ease.
A steady stream of labor data builds toward that Friday release, including manufacturing and services activity readings and job openings figures, all of which will shape rate expectations after this week's cautious message from the Fed.
Long-term Treasury yields remain the key variable to watch for small caps. Whether this week's easing holds or yields resume their climb will do much to determine how smaller companies trade. Oil and the ongoing Middle East situation stay in the mix as wildcards. Note that it is the last full week before the Labor Day holiday, so activity may quiet down ahead of the long weekend.
The bottom line heading into next week: the jobs report is everything. It will set the tone for the Fed's September decision and the outlook for smaller companies. Stocks enter with modest momentum but a less certain rate path.
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SmallCapStocks Team
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