While Wall Street celebrated a winning week, the pervasive specter of inflation loomed large, especially after the latest personal consumption expenditures (PCE) price index readings and Federal Reserve Chairman Kevin Warsh's significant keynote speech at Jackson Hole. One message resounded clearly: the fight against inflation is far from over.
Stocks, after a robust week, felt renewed pressure on Friday following Warsh's remarks. He expressed palpable concern regarding the trajectory of inflation, stating, "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 echoed sentiment throughout the week, as sticky inflation, with the PCE price index rising slightly above expectations in July, weighed heavily on investor mood, despite an in-line consumer price index (CPI) reading earlier in the month.
Bill Birmingham, managing director at REX Financial, underscored the urgency of Warsh's message. "[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," Birmingham explained in an interview. Following the chairman's Jackson Hole speech, expectations for an interest rate hike by the Fed at its September meeting intensified, leading to a notable spike in shorter-dated Treasury yields. Birmingham, commending Warsh's "refreshingly straightforward" address, believes the odds for a rate hike could climb even higher, adding, "It feels very clear that that is where they want to go."
Amidst these inflation jitters, a significant market driver for the week's overall gains was the resounding reaction to Nvidia's latest earnings report. After Wednesday's closing bell, the chipmaker unveiled second-quarter results that impressively surpassed both top and bottom-line analyst estimates, with its revenue more than doubling year-over-year. The company further fueled investor optimism by forecasting a stunning 70% revenue growth for fiscal 2028, considerably exceeding the 44% analysts had projected.
The following day, Nvidia's stock soared nearly 9%, decisively breaking its recent pattern of post-earnings declines over the previous four reports. Melissa Brown, global head of investment decision research at SimCorp, believes this strong performance is sufficient to assuage investor anxieties surrounding "circular financing." She noted, "Maybe this holds off that discussion for a little while because it does seem, in fact, that the revenues are still there."
However, Brown also highlighted a burgeoning concern: the increasing divergence between AI-related stocks and the rest of the market. "You're getting this low correlation across stocks. It's really messing with the risk statistics of the market," she warned. Brown elaborated on the implications of this concentration, stating, "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."
