Wall Street closed out a winning week for stocks, but lingering inflation worries cast a shadow on Friday's trading. Federal Reserve Chairman Kevin Warsh's remarks at Jackson Hole signaled ongoing concerns about the trajectory of inflation, even as recent readings showed some improvement.
Warsh stated, "While this summer's PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved." His comments come as the personal consumption expenditures (PCE) price index, a key inflation gauge watched by the Fed, rose slightly more than anticipated in July. This followed a consumer price index (CPI) reading that met expectations earlier in the month.
"[Warsh] really wants to make sure that inflation expectations, if it's not too late already, don't become embedded into the economy, and there are real reasons to worry about that," noted Bill Birmingham, managing director at REX Financial. Warsh's speech also fueled an increase in expectations for a potential interest rate hike by the Federal Reserve at its September meeting, leading to a spike in shorter-dated Treasury yields.
Birmingham described the chairman's speech as "refreshingly straightforward" and believes the probability of a rate hike could climb even higher, stating, "It feels very clear that that is where they want to go."
Nvidia's Earnings Fuel Market Gains
A significant driver of the market's positive weekly performance was the strong reaction to Nvidia's latest earnings report. The chip giant exceeded analyst expectations on both the top and bottom lines for its second quarter, with revenue more than doubling year-over-year. Furthermore, Nvidia projected revenue growth of 70% for fiscal year 2028, significantly surpassing the 44% anticipated by analysts.
The day after the announcement, Nvidia's stock surged nearly 9%, breaking a pattern of post-earnings declines seen in its previous four reports. Melissa Brown, global head of investment decision research at SimCorp, suggested that this robust performance could alleviate investor concerns regarding circular financing. "Maybe this holds off that discussion for a little while because it does seem, in fact, that the revenues are still there," she commented.
However, Brown also pointed to a growing divergence between AI-related stocks and the broader market. "You're getting this low correlation across stocks. It's really messing with the risk statistics of the market," she warned. "You've got so much concentration in the market that if you just buy a few stocks, you have really no idea whether they're going to be volatile or not. That concentration, which clearly is just getting bigger and bigger, is particularly worrisome."
