Stable Growth and Shifting Tailwinds

1. Economic Momentum Holding Steady Despite Sticky Inflation. The latest economic data support a narrative of stable and resilient growth. GDP is tracking above 2.5 percent according to the Atlanta Fed, underpinned by stronger-than-expected retail sales and steady labor market conditions. This comes despite continued concerns around sticky inflation. The Consumer Price Index came in at 2.7 percent, a far cry from the 9.1 percent peak three years ago. Importantly, the shelter component—which represents 34 percent of the CPI basket and has been one of the main contributors to inflationary pressure—is beginning to moderate.

Producer prices were slightly more concerning at 3.3 percent. However, the increase was largely influenced by a 5.8 percent rise in portfolio management fees, which is market-related rather than structural. Trade services inflation did come in higher than expected and may reflect pressure from tariffs, warranting further monitoring. Despite these figures, markets remain confident that the Federal Reserve will proceed with easing. There is currently a 94 percent probability of a 25-basis point rate cut in September. Attention now turns to next week’s Jackson Hole Economic Symposium, where Fed Chair Jerome Powell is expected to speak.

2. Consumer Resilience and a Rebound in Retail. The consumer continues to demonstrate strength, supported by a robust labor market. Weekly jobless claims remain tame at 221,000, and retail sales exceeded expectations, particularly within the control group that feeds directly into GDP. This has reinforced the view that consumer demand remains a critical driver of economic expansion.

Analysts are turning increasingly bullish on the retail sector heading into the back-to-school season. Amazon is showing continued momentum, with North America retail revenue up by 11 percent and international up by 16 percent. AWS posted growth of 17.5 percent. Of particular interest is Amazon’s expansion into same-day grocery delivery, a segment with a total addressable market of $941 billion. Amazon currently holds just 5 percent of that market, leaving substantial room for growth.

Other areas within retail, including apparel and discretionary spending, are also showing signs of strength. Companies like Gap, Ralph Lauren, and Inditex, which owns Zara, are benefiting from renewed consumer interest. Zara, in particular, continues to resonate strongly with younger demographics. Although Inditex’s limited float makes the stock less liquid, its operating performance has been compelling.

3. Housing and Auto Sector Signals a Turnaround. The housing market, previously a weak spot in the recovery, appears to be turning a corner. Shares of D.R. Horton have climbed 24 percent since reporting disappointing earnings that were nonetheless in line with expectations. This price action reflects improving investor sentiment and a belief that the worst may be behind the sector. Broader homebuilder stocks are showing signs of technical basing and reversal. The sector is particularly important given housing’s large multiplier effect on the economy. Berkshire Hathaway’s continued investment in homebuilders such as D.R. Horton has drawn additional attention to the group. While affordability and supply constraints remain headwinds, underlying demand appears intact and is beginning to be reflected in stock performance.

Another sign of shifting investor sentiment came from the healthcare sector, where UnitedHealth Group surged nearly 14% following news that Berkshire Hathaway had acquired 5 million shares of the company. The move, valued at approximately $1.57 billion, was widely interpreted as a vote of confidence from Warren Buffett in the long-term prospects of the insurer. Buffett’s investment not only sparked a sharp rally in UNH shares but also lifted sentiment across the broader managed care space. While challenges remain, the market appears to be reassessing the sector’s valuation and recovery potential.

The auto sector is also showing signs of improvement. Consumer demand for vehicles has held up better than expected, further supporting discretionary spending trends. This comes at a time when broader consumer discretionary names, which have lagged in recent years, are beginning to attract renewed interest. The possibility of a broader recovery in retail and discretionary sectors is now on the table, particularly if key players, like Target, can stabilize.

4. AI Investment Shifts from Creation to Implementation. Artificial Intelligence remains a key investment theme, but the focus is beginning to evolve. Adoption among individuals continues to outpace that of corporations due to fewer regulatory and implementation hurdles. For enterprises, the conversation is shifting from creation to integration. This transition plays directly into the strengths of companies like Salesforce, IBM, and Cisco.

Cisco reported a strong quarter, with 10 percent organic growth and $2.1 billion in AI infrastructure orders, a sharp increase from essentially zero a year ago. Networking and security divisions also saw strong double-digit growth and a sequential 9 percent increase, respectively. Cisco’s global footprint and exposure to enterprise infrastructure make it a strong proxy for enterprise technology demand.

IBM’s CEO, Arvind Krishna, stated that corporate America is still in the very early stages of AI adoption, describing the environment as the first inning of a long cycle. Krishna also pushed back on concerns that AI will displace traditional software, stating with confidence that a reacceleration in software demand is likely in the second half of the year. His comments suggest that recent weakness in software names could present an opportunity for investors.

5. Commodity Prices Remain a Tailwind for Consumers. Energy prices have also contributed positively to the economic backdrop. Oil is down 11 percent year-to-date, and natural gas prices have declined 23 percent. These declines reduce costs for both consumers and businesses, adding to disposable income and potentially offsetting some of the impact from tariffs and inflation. Geopolitical developments are also being closely watched. Talks involving Russian President Vladimir Putin and President Donald Trump have raised the possibility of a ceasefire in the region. While negotiations are still active, any form of de-escalation could support lower commodity prices and market stability.

6. Looking Ahead. The coming week will be light on economic data, but significant in terms of market implications. The annual Jackson Hole Economic Symposium begins on August 21, with Powell’s remarks likely to influence market expectations for monetary policy heading into September. Investors will also watch earnings reports from major retailers, including Home Depot and Target. Target faces high expectations following a period of underperformance. A credible turnaround or announcement of a CEO successor could mark a meaningful inflection point.

Seasonal weakness in September has been well-documented historically. However, many believe that any volatility or market softness should be seen as a buying opportunity. With economic data continuing to surprise to the upside, earnings showing margin resilience, and areas like Retail, Housing, and Software gaining momentum, the fourth quarter could be poised for a strong finish.

7. Fixed Income. The U.S. Treasury curve steepened last week in response to conflicting inflation data. On Wednesday, the 2-year yield declined to a three-month low of 3.67%, driven by July’s Consumer Price Index (CPI) report, which reinforced market expectations for a potential rate cut in September. However, this rally was short-lived. Yields reversed sharply on Thursday following the release of the Producer Price Index (PPI), which came in notably stronger than anticipated across both headline and core metrics—on both monthly and annual comparisons. By Friday’s close, the 2-year yield was lower by 1 basis point, while the 10- & 30-year yields were higher by 3 & 7 basis points, respectively. The market now shifts focus to northwestern Wyoming, where Federal Reserve Chair Jerome Powell is set to give a policy speech on Friday at the annual Jackson Hole Economic Symposium.

Investment-grade and high-yield spreads moved tighter for their second straight week. Investment-grade spreads compressed 5 basis points to +116, while high-yield spreads narrowed 6 basis points to + 334. Concurrently, U.S. credit quality improved as the main rating agencies issued 30 upgrades and 26 downgrades. The Energy sector accounted for the majority of the upgrades, while the Materials sector led with the most downgrades.

Tax-exempt yields mirrored the directional shifts in the Treasury market last week. Short-term municipal yields declined by 1–2 basis points, while long-term yields rose by 2–3 basis points, contributing to a modest steepening of the curve. This week’s primary market is expected to remain supportive, underpinned by a manageable $7.5 billion in tax-exempt supply. Notably, this marks the lowest non-holiday issuance volume since the week of April 7th.

The Week Ahead.

Economics- Tuesday: Housing and Construction, Central bank, Wednesday: Monetary Policy, Central Bank, Thursday: Labor Market,

Earnings – Monday: PANW, Tuesday: MDT, HD, KEYS, Wednesday: TGT, EL, JKHY, LOW, ADI, TJX, Thursday: WMT, NDSN, ROST, INTU, WDAY

Stephanie Link’s TV Schedule:

Return for Selected Indices^[1]

Sources:

^[1] Source: Bloomberg. As of August 18, 2025.

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