09/03/2026
Market Update
Stocks and bonds advanced in August despite elevated Treasury yields.
Markets remained resilient during August. Concerns over the federal budget deficit, persistent inflation, and heavy corporate bond issuance kept the 30-year Treasury yield near a multi-decade high. Yields were volatile, but longer-term yields ended the month little changed. Despite the challenging rate backdrop, most major asset classes finished August with positive returns.
Equities gained broadly across market capitalizations: Large caps (S&P 500) gained +2.7% and outpaced small caps (Russell 2000) which rose +1.0%. Continued strength in corporate earnings and growing confidence that economic growth can moderate without a significant downturn was supportive of higher stock prices.
Interest income continued to support bond returns: The Bloomberg US Agg Bond Index rose +0.4%. Interest income was the primary driver of returns, as longer-term yields were relatively unchanged. Mortgage-backed securities climbed +0.5%, corporate bonds gained +0.4% and Treasuries rose +0.3%.
International equities kept pace in August and continued to lead year-to-date returns: Emerging markets (MSCI EM) benefited from rebounds in Taiwan (+6.4%) and South Korea (+5.9%) following July’s tech-related selloff. A weak dollar also helped boost non-U.S. stocks.
Equities
Cyclical and defensive sectors led markets higher as leadership continued to broaden.
While technology stocks continued to perform well, leadership expanded to include energy, materials, and health care. The broadening of market participation suggests investors are placing greater emphasis on valuations, earnings quality, and diversification.
Energy and materials led cyclical sectors higher as market breadth improved: Energy stocks gained on strong revenue growth, ongoing supply constraints, and uncertainty in the Middle East. Materials benefited from AI infrastructure spending and a favorable commodities backdrop.
Health care outperformed as investors positioned more defensively: Rising geopolitical tensions and interest rate volatility increased demand for traditional defensive sectors. Health care stocks benefited from stable earnings, attractive valuations, and lower sensitivity to economic conditions.
Second quarter earnings continued to exceed expectations: With 97% of S&P 500 constituents reporting, revenue growth was +15.5% year-over-year, the strongest pace since the fourth quarter of 2021. All eleven sectors reported positive revenue growth, led by energy (+42%) and technology (+37%)1.
Fixed Income
Long-term Treasury yields were largely unchanged in August despite elevated volatility.
Fixed income markets navigated interest rate volatility as investors weighed sticky inflation, a growing U.S. fiscal deficit, and uncertain Fed policy. Ultimately, yields were little changed in August, and most bond sectors posted positive returns.
Long-term Treasury yields remained near a multi-decade high: 10- and 30-year Treasury yields ended the month at 4.75% and 5.25%, respectively. Elevated longer-term rates continued to provide investors with attractive income opportunities but may suggest markets expect borrowing costs to remain elevated.
Corporate borrowing remained strong despite high interest rates: A rising supply of corporate bond issuance likely contributed to rate volatility, but investor demand was strong, reflecting confidence in corporate balance sheets and the broader economy.
Treasury Buyback Program
The U.S. Treasury accelerated its buyback program to provide additional demand for long-term bonds.
The Treasury buyback program allows the government to repurchase older, less actively traded bonds from investors. The goal is to improve liquidity and trading conditions in the Treasury market. However, the announcement in August to double the level of buybacks in the next few months may also help reduce upward pressure on long-term interest rates.
Historical buybacks provide limited insight into how the current program may affect rates: The first Treasury buybacks occurred in 2000, but the current program only began in May 2024, leaving little historical data for comparison. Treasury’s review found the program has improved liquidity for older (“off-the-run”) bonds, but success has primarily been measured in terms of market liquidity, rather than a sustained reduction in yields. Longer-term yields have traded in a narrow range since the announcement on August 19.
Elevated borrowing costs likely increased pressure for a policy response: Long-term Treasury yields remained near multi-decade highs during August as investors grappled with persistent inflation, large fiscal deficits, and heavy government borrowing. With inflation still well above the Fed’s 2% target, policymakers have limited flexibility to lower rates, increasing the importance of other tools that may help ease borrowing costs.
Midterm Elections
History suggests midterm years bring higher stock volatility followed by strong post-election gains.
This year’s midterm elections take place on November 3. Historically, markets have experienced higher volatility in the months leading up to the vote before moderating once the outcome is determined.
Political uncertainty often leads to elevated volatility: Uncertainty surrounding potential changes to fiscal, tax, and regulatory policies can increase market volatility. However, as outcomes become clearer markets typically refocus on economic fundamentals, corporate earnings, and Fed policy.
Markets and the economy have fared well under each government configuration: While average returns and economic growth have varied across political environments, history suggests investors have generally been rewarded for staying invested.
Economic Calendar
Nonfarm payrolls and retail sales softened while inflation improved.
Economic data released in August pointed to some gradual slowing, though the underlying conditions remained relatively resilient as job growth and consumer spending softened while inflation was lower.
Job growth slowed, but the labor market may be more resilient than the figures suggest: Nonfarm payrolls declined by -23k in July, though the weakness was largely driven by a -53k drop in government jobs that many economists believe was influenced by seasonal factors that could be revised away4.
Inflation rates fell from July but remained elevated: CPI rose 3.4% year over year while core inflation, which excludes volatile food and energy prices, rose 2.5%. The report reduced the likelihood of a September rate hike, though inflation remained well above the Fed target of 2%, supporting a higher for longer interest rate environment.
Retail sales declined for the first time in nine months: Consumer spending fell -0.6% in July. Following a tax refund driven bounce in the second quarter, spending has softened as households adjust to higher food and energy costs and rising mortgage rates.
