Easing Inflation and Weak Payrolls Fuel Broad Rally as Rising Bond Yields and Strong Earnings Tell the Same Story

Weekly Market Commentary | Week of Aug 17th, 2026

A Recap of Economic and Financial Trends from the Prior Week

By: Michael Horvath, The Quinnipiac University Global Economics Research Team

Last Week in Review

• July CPI rose 3.4% annually and core CPI eased to 2.5%, reducing the probability of a September Fed rate hike from approximately 52% to 32%

• The S&P 500 and Nasdaq posted their biggest weekly gains in three months on Middle East peace deal hopes and solid earnings, with small-cap and value stocks leading

• Japan's Nikkei surged 4.74% on strong memory earnings and yen weakness, speculation of an imminent BoJ rate hike lifted bank shares, and China's inflation softened more than expected as the oil price shock appeared to recede

Economic Recap

U.S. economic data last week delivered meaningful inflation relief alongside signs of consumer softening. The Bureau of Labor Statistics reported that CPI rose 0.1% in July and 3.4% over the prior 12 months, with both figures in line with consensus estimates and marking the second consecutive month in which both headline and core CPI eased year over year, each declining 0.1 percentage point from June. Core CPI rose 0.2% month over month and 2.5% year over year. Thursday's PPI data provided additional relief, with core producer prices rising 0.2%, below the consensus estimate of 0.3% and down from June's revised 0.4%, while headline PPI rose 4.7% year over year, below estimates and down from June's 5.5%. The softer inflation reports reduced the probability of a September rate hike from approximately 52% to approximately 32% by Friday afternoon. Fed officials nonetheless maintained a hawkish posture, Cleveland Fed President Beth Hammack reiterated her view that policymakers should raise rates to prevent the economy from overheating, while Richmond Fed President Tom Barkin said it remained an open question whether additional tightening would be necessary to bring inflation back to target. Retail sales fell 0.6% month over month in July, the largest monthly drop since May 2025 and well below estimates for a 0.1% increase, with control group sales down 0.4%. The University of Michigan's preliminary August consumer sentiment index fell 4.2 points to 51.0, snapping a two-month streak of gains, with year-ahead inflation expectations ticking up to 4.3% from 4.2%. U.S. Treasury yields diverged sharply across the maturity spectrum, with shorter-term yields falling after the softer inflation and payroll data while the 10-year note auction cleared at its highest yield since 2007 and the 30-year bond auction cleared at its highest yield since 2001 amid heavy supply and persistent fiscal concerns.

Internationally, the STOXX Europe 600 declined modestly as hopes for a Hormuz peace deal faded and extreme heat disrupted French nuclear generation, adding to regional energy price volatility. The Sentix Economic Index for the eurozone returned to positive territory in August for the fourth consecutive monthly increase, while the Bank of France estimated Q3 growth of 0.2%. The Bank of England's Chief Economist Huw Pill said stronger-than-expected UK GDP figures reinforced the case for higher borrowing costs, with the 10-year gilt yield moving above 5%. Bloomberg reported that the Takaichi government is supportive of a near-term BoJ rate hike given yen weakness and inflationary pressures, with the yen trading at approximately JPY 159 against the U.S. dollar. In China, CPI rose just 0.5% year over year in July, down from 1.0% in June and a six-month low, primarily driven by slowing gasoline price increases, while core CPI eased to 0.9%. PPI moderated to 3.5% year over year from 4.1%, its first slowdown since March.

Market Recap

Source: JPMorgan Asset Management, “Weekly Market Recap” (August 17^th, 2026). (Chart © JPMorgan Asset Management. Chart used under fair use for educational commentary by The Quinnipiac Global Economics Research Team.)

Major U.S. stock indexes posted their best weekly performance in three months, driven by a combination of softer inflation data, easing rate hike expectations, hopes of a Middle East peace agreement, and continued strong corporate earnings. The S&P 500 gained 0.39% to 7,786 and is up 14.54% year to date, while the Nasdaq Composite advanced 0.16% to 26,729 and is up 13.44% year to date. The Russell 2000 led major indexes, rising 1.15% on the week and now up 24.47% year to date, while the Dow Jones Industrial Average declined 0.53% to 53,732 and is up 12.21% year to date. The Russell 1000 Value gained 0.39% and is up 23.96% year to date, while the Russell 1000 Growth rose 0.52% and is up 6.65% year to date, sustaining value's pronounced year-to-date outperformance. Information technology and consumer discretionary led S&P 500 sector gains, while energy and real estate lagged. Treasury yields diverged meaningfully, with shorter-term yields falling as rate hike expectations eased while long-term yields remained elevated, steepening the two-year/30-year curve by approximately 20 basis points since the last Fed meeting.

Internationally, the MSCI EAFE gained 0.59% and is up 15.44% year to date, while MSCI EM advanced 2.67% and is up 22.96% year to date. Japan's Nikkei 225 surged 4.74% on the week, driven by memory company earnings strength and exporters benefiting from yen weakness, while bank shares advanced on BoJ rate hike speculation. The pan-European STOXX Europe 600 declined 0.36% in local currency terms, with Germany's DAX gaining 0.46%, France's CAC 40 falling 0.90%, and the UK's FTSE 100 dropping 1.39%. China's CSI 300 fell 0.61% and Shanghai Composite edged down 0.33%, while Hong Kong's Hang Seng declined 2.15% on weakness in internet heavyweights.

Market Themes

Strong Earnings and Rising Bond Yields Are Two Signals of the Same Structural Story

BlackRock Investment Institute argues that rapidly rising earnings forecasts and higher government bond yields are not contradictory signals but rather two expressions of the same structural changes reshaping markets. Consensus earnings forecasts for 2026 continue to be revised higher even as long-term rates rise, reflecting the AI-driven productivity gains and capital spending cycle that are simultaneously lifting corporate profits and intensifying competition for capital. BlackRock expects U.S. corporate earnings to grow 11.6% annually over the next five years, a pace seen in only approximately 15% of historical five-year periods. The firm notes that five years after the last economic downturn, 2026 earnings estimates are still being revised upward rather than down, which it views as evidence of structural rather than cyclical forces. This environment calls for a different approach to portfolio construction, one focused on underlying drivers of risk and return rather than traditional asset class labels, as long-standing macro anchors such as stable inflation expectations have become less reliable.

Equities and Durable Income Are Preferred Over Long Duration in a Higher-Rate World

BlackRock Investment Institute maintains a strategic preference for equities over developed market government bonds, reflecting its view that long-term yields have more room to rise as governments, AI hyperscalers, and companies across the economy compete ever more intensely for capital. The firm remains strategically underweight long-duration bonds, which it views as a less reliable portfolio diversifier and as exposed to further yield increases from persistent inflation, rising public borrowing, and greater bond market volatility. Rather than reaching out the curve, BlackRock favors building durable income through short- and medium-term Treasuries, agency mortgage-backed securities, selected private credit with resilient cash flows, and overweight emerging market local currency debt. The firm prefers growth exposure through equities, particularly in technology and health care where structural shifts support earnings growth, and through infrastructure equity in power, grids, and data centers tied to the AI buildout. Tighter credit spreads prompted BlackRock's new strategic underweight in high yield this quarter, reinforcing its view that equities are better positioned than credit if earnings strength persists and that rising dispersion between stronger and weaker borrowers makes manager selection increasingly important.

Chart of the Week

Source: BlackRock Investment Institute with data from LSEG Datastream, "Breaking the Cycle: S&P 500 Earnings Growth Estimate Paths, 2021-2027," August 7, 2026. Notes: Lines show the evolution of calendar year earnings estimates over time for the S&P 500 index. (Chart © BlackRock Investment Institute. Used under fair use for educational commentary by The Quinnipiac Global Economics Research Team.)

The chart plots the evolution of S&P 500 earnings growth consensus estimates for each calendar year from 2022 through 2027, showing how forecasts for each year changed over the period from 2021 through mid-2026. For most prior years, estimates began at a higher level and were revised down as the year progressed, reflecting the typical business cycle pattern of analyst optimism giving way to economic reality. The 2026 line breaks sharply from this pattern, with estimates starting at approximately 10% at the beginning of the year and continuing to be revised upward through mid-2026, reaching above 25%, the highest trajectory of any year in the series. The 2027 line begins at approximately 15% and also trends higher. BlackRock uses this chart to illustrate that the AI-driven earnings cycle is structurally different from prior cycles, where estimates typically declined over time, and to support its view that above-trend earnings growth is durable rather than mean-reverting in the near term, underpinning its overweight to U.S. equities.

Market Outlook

July inflation data are the primary focus this week, with BlackRock expecting some rebound from June's softer reading, which it views as reflecting normalization in a handful of categories rather than a sustained disinflationary trend. The key watch is services inflation: sustained moderation there would strengthen the case for policy easing more than a single weak payroll reading. China's total social financing data will provide an early read on credit conditions, while UK preliminary GDP and trade balance data will offer a further read on how the British economy is navigating the combination of elevated energy prices and restrictive monetary policy. BlackRock notes this is its final weekly commentary before a summer publishing pause, with the next edition due Monday, August 31.

Calendar Events

Economic Data:

Aug. 18 (Tue): Import Prices, Industrial Production, Capacity UtilizationAug. 20 (Thu): Jobless Claims

Aug. 21 (Fri): US Lash Manufacturing/Services PMI

Major Corporate Earnings:

Aug. 20 (Fri): Walmart Inc. (Q2 2027)

Sources

J.P. Morgan Asset Management. "Weekly Market Recap PDF." J.P. Morgan Asset Management. https://am.jpmorgan.com/content/dam/jpm-am-aem/americas/us/en/insights/market-insights/wmr/weekly_market_recap.pdf

J.P. Morgan Asset Management. "Economic Update." J.P. Morgan Asset Management. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/economic-update/

T. Rowe Price. "Global Markets Weekly Update." T. Rowe Price Insights. https://www.troweprice.com/personal-investing/resources/insights/global-markets-weekly-update.html

BlackRock Investment Institute. "Weekly Investment Commentary: Two Market Signals, One Story." BlackRock, August 10, 2026. https://www.blackrock.com/us/individual/literature/market-commentary/weekly-investment-commentary-en-us-20260810-two-market-signals-one-story.pdf

BlackRock Investment Institute. "Weekly Commentary Archives." BlackRock. https://www.blackrock.com/corporate/insights/blackrock-investment-institute/archives

Apollo. "The Daily Spark." Apollo. https://www.apollo.com/wealth/insights-news/insights/daily-spark

MarketWatch. "Economic Calendar." MarketWatch. https://www.marketwatch.com/economy-politics/calendar

Yahoo Finance. "Earnings Calendar." Yahoo Finance. https://finance.yahoo.com/calendar/earnings/