The labor market warmed up in August, with 162,000 new jobs that were well ahead of expectations. Corporate earnings are just as scorching — S&P 500 profits jumped 52% year-over-year (Y/Y) in Q2, the fastest pace since 2021, with earnings from the Magnificent 7 up a blistering 118.5%. The U.S. economy is holding its own heat, with manufacturing and services activity firmly in expansion territory even as inflation remains stubbornly high. However, inflation remains hot as well, and that heat hasn’t gone unnoticed at the Fed. Chairman Kevin Warsh used his Jackson Hole keynote speech to make clear that taming inflation remains the central bank’s top priority, and the Fed raised the Fed Funds rate by 25 basis points at their September meeting.
The eurozone is warming up too, its composite PMI hitting an eight-month high of 52.0 as German manufacturing production heated up at its fastest clip since January 2022. China remains the negative outlier, with manufacturing activity contracting for a second straight month and non-manufacturing activity stuck below the expansion line.
It was not just the markets running hot this summer — record-breaking temperatures scorched much of the country while the ongoing war involving Iran added another layer of heat to an already tense geopolitical backdrop. Diesel prices are also scorching, hitting an all-time high as wars on two continents strain global refining capacity. However, India’s economy is sizzling with 7.8% growth even as inflation risks smolder in the background. With four straight years of strong markets now, the question is not whether things are heating up — it is how much longer this red-hot run can last, and whether the Fed will need to turn up the pressure to cool it down.
Strong U.S. Economy and Persistent Inflation Keep Fed Rate Hikes in Focus
- The U.S. economy added a better than expected 162,000 new jobs in August, well ahead of the 53,000 estimate. The unemployment rate remained steady at 4.1% and the June and July reports were revised solidly higher. Restaurants and bars led with 59,000 new jobs, while education rose by 42,000 and manufacturing contributed 16,000. Health care, the primary engine of job growth, saw a gain of just 13,000, compared with its monthly average of 32,000 over the prior 12 months. Average hourly earnings increased 3.1% Y/Y. The broader U6 unemployment rate actually fell last month to 7.7%.
- August CPI was in-line with expectations. Headline CPI rose 0.4% month-over-month (M/M) in August or 3.4% Y/Y while core CPI rose 0.3% M/M or 2.4% Y/Y. Gas prices jumped 3.9% last month, accounting for more than one-third of the monthly gain in CPI. Food prices rose 0.1% M/M, shelter costs increased 0.3%, and transportation services surged 0.5%. One way energy prices impact core CPI is through airline prices, which spiked 23.4% M/M.
- Federal Reserve Chairman Kevin Warsh used his Jackson Hole keynote speech to hammer home a message that curbing inflation is the central bank’s highest priority. While Warsh doubled down on his commitment to avoid forward looking guidance to financial markets, he did offer some clues into his economic views. He warned that inflation is not meaningfully slowing and that policymakers must be confident it is before enacting any monetary easing. He also added that current financial conditions were not restraining the U.S. economy. In September, the Fed raised the Fed Funds rate by 25 basis points and reiterated the Fed’s 2% PCE inflation target.
Source: U.S. Bureau of Labor Statistics
U.S. Manufacturing, Services and Corporate Earnings Show Strong Growth
- The manufacturing sector in the U.S. saw continued strong activity in August based on the ISM Manufacturing PMI. While the headline reading fell from 55.6 in July to 54.6 in August, the measure remains firmly into expansion territory and is supported by strong underlying fundamentals. New orders, production, and employment all fell last month but remained well above the 50 level that separates expansion from contraction. The ISM Services PMI strengthened in August on the heels of a surge in new orders, production, prices, and inventories. Survey respondents pointed to strong business conditions but cited higher prices and shortages in areas like memory as potential risks on the horizon.
- 97% of the way through the Q2 earnings reporting season for the S&P 500, earnings growth has come in at a remarkable 52%, the highest rate of growth since Q2 2021. The Magnificent 7 grew earnings by 118.5% in Q2 compared to an extraordinarily strong 31.8% for S&P 500’s other 493 companies. Amazon and Alphabet reported huge one-time in nature trading gains that, if removed, would still put earnings growth at 43.2% for the “Mag 7”. Earnings are projected to grow 25%+ in Q3 and Q4 with full year 2026 earnings growth estimated at 31%.
Source: FactSet
European Economic Growth Improves as China’s Economy Remains Weak
- The eurozone composite PMI hit an eight-month high of 52.0 in August, matching July’s reading. The pick-up in the rate of expansion reflected an accelerated rise in manufacturing production, with the latest increase the fastest in 4.5 years. In fact, the headline manufacturing PMI — a weighted average of five key sub-indices — rose to 52.8, its highest since May 2022. The improved manufacturing growth picture was in large part centered on Germany, where production rose at the fastest pace since January 2022. Eurozone services activity increased modestly, with the pace of expansion unchanged from that seen in July.
- China’s manufacturing activity in August shrank for a second straight month, keeping the pressure on Beijing to support the economy as growth loses momentum. The official PMI reading came in at 49.8 in August, up slightly versus the 49.2 reported in July. Supply and demand both improved in August with the sub-indexes tracking production and new orders expanding to 50.4 and 50.6, respectively. The smaller company focused RatingDog Manufacturing PMI remained in expansion territory for the ninth straight month with a reading of 51.5 in August. China’s official Non-Manufacturing PMI held at 49.0 in August 2026, unchanged from July and below expectations of 49.5, pointing to a continued contraction in non-manufacturing activity.
India’s Economic Growth Beats Expectations in Q2
India’s economy expanded 7.8% Y/Y in Q2, blowing past forecasts as an investment boom and manufacturing strength added to already-solid consumer demand. Q2 growth beat the 7.1% estimate but was down sharply from the 8.6% growth rate from Q1. Growth is projected to be north of 7% for the full year with the biggest risk to that forecast being the headwind from higher energy prices and persistent inflation.
Higher Oil and Diesel Prices Add to U.S. Inflation Risks
The price of diesel fuel hit an all-time high on September 4 as wars on two continents and a global refinery shortage have pushed prices upward. The average nationwide price was $5.85 per gallon according to AAA’s gas price tracker. Russia has long been the world’s second-largest exporter of diesel fuel after the U.S. Ukrainian drone strikes on Russia’s oil refineries have cut into the country’s diesel production. Facing a potential domestic supply shortage, Russia recently extended a diesel export ban through the end of September, straining what were already critically low global diesel reserves. Total diesel exports from the U.S. hit an all-time high last month as the world scrambled to adjust to the loss of Russia’s supply.
Source: AAA
2026 Midterm Elections: What Investors Should Know About Market Impact
- We are less than two months away from the highly anticipated mid-term elections and Democrats are expected to win the House while several key Senate races will determine party control. President Trump’s approval rating is low, typically a bad sign for the party in power entering the mid-terms. Polls have become less reliable, and the outcome and market impact could be significant. Divided government is probably the best outcome for markets, as resulting gridlock means no major policy changes are likely. Republicans maintaining full control of government is unlikely but may spark positive market reaction should it occur.
- Under any potential scenario, the best possible decision for investors is to remain fully invested according to their investment objective and long-term plan, as markets tend to move higher over the long-term regardless of who controls government. The economic backdrop, monetary policy, and corporate earnings growth are more important for market performance than who occupies the White House.
Sources: Strategas, FactSet
