Written by: Brian Jacobsen PhD, JD, CFA®, CFP®, CAIA, CBE | Chief Economic Strategist
September 1, 2026 (data and market prices through August 31)

August gave investors plenty to celebrate. The S&P 500 gained 2.6%, the Nasdaq Composite rose 3.9%, and the Dow added 1.3%. The S&P 500 finished the month at 7,686.14, up 12.3% for the year. Those gains were not built entirely on hope. Corporate profits were strong, artificial-intelligence spending remained robust, and Nvidia’s latest results suggested the AI buildout still has plenty of runway.

But new highs come with higher stakes. August ended with Brent crude oil back above $90 per barrel and the 10-year Treasury yield around 4.75%, its highest level since January 2025. Inflation is improving in some places but remains well above the Federal Reserve’s target in others. The labor market is not collapsing, but it is barely advancing. And Chair Kevin Warsh used his first Jackson Hole address to make clear that the Fed’s 2% inflation objective is a “firm, fixed target.”

The market has climbed a long way despite all of that. Now the margin for error may be getting smaller.

Macro: What Mattered in August

Labor: Lumbering, Not Lurching

The labor market increasingly looks like it is stuck in low gear. Nonfarm payrolls fell by 23,000 in July while the unemployment rate fell to just 4.1%. The latest Job Openings and Labor Turnover Survey showed 7.4 million openings, 5.3 million hires and 5.4 million separations. Quits were 3.2 million and layoffs just 1.8 million. Businesses are not doing much hiring, but they are not doing much firing either.

That distinction matters. In a normal expansion, very small payroll gains would look alarmingly weak. In today’s economy, the signal is murkier because labor-force growth itself has slowed. Warsh argued at Jackson Hole that the labor market remains consistent with full employment even with much lower monthly job gains.

That makes this a lumbering labor market rather than a lurching one. Workers are not moving around much. Employers are not adding many people, but they are not shedding many either. This is written before the August payroll report comes out on September 4, but the trend so far has been to from rapid job gains early in the year to a sluggish summer.

Figure 1: A Lumbering Labor Market: Low Hiring, Low Firing

A Lumbering Labor Market: Low Hiring, Low Firing

Source: U.S. Bureau of Labor Statistics, June 2026 Job Openings and Labor Turnover Survey

Inflation & The Fed: Better, But Probably Not Fast Enough

Inflation is moving in the right direction. The question is whether it is moving quickly enough for Chair Warsh. July’s Consumer Price Index rose just 0.1% for the month. Headline inflation slowed to 3.4% from a year earlier, while core inflation eased to 2.5%. That is genuine progress. The Fed’s preferred Personal Consumption Expenditures measure was less comforting. Headline PCE inflation remained at 3.7% and core PCE inflation at 3.3%, although both increased a relatively moderate 0.2% in July.

Jackson Hole provided a useful window into how Warsh will judge those numbers. He said policymakers need to focus on both the direction and the speed of underlying inflation. Over the past year, 54% of the components in the PCE basket have risen more than 3%. Over the past six months, the share is 49%. Both are down sharply from their post-pandemic peaks, but inflation is both too high and too broad. Chair Warsh said his standard is that inflation must be moving toward 2% clearly and at sufficient speed; otherwise, the Fed has more work to do.

That is why a few favorable CPI reports may not be enough. The destination looks better. The speedometer still bothers him. Oil makes the decision harder. Brent crude ended August at $90.49 as fighting around the Strait of Hormuz intensified again. Energy does not determine underlying inflation, but it can influence headline prices, inflation expectations, transportation costs, and eventually some broader prices. The summer’s inflation improvement is real, but not yet secure.

Figure 2 Inflation Is Moving the Right Way, But PCE Still Has Work to Do

Inflation: Better, But Still Above Target

Source: U.S. Bureau of Labor Statistics and U.S. Bureau of Economic Analysis, July 2026

Markets: New Highs, Higher Stakes

The market’s strength deserves some respect because earnings are helping support it. FactSet reported that the Magnificent Seven generated 118.5% year-over-year earnings growth in the second quarter. That number flatters reality because enormous investment gains at Alphabet and Amazon flowed through reported earnings. Remove those two companies and Magnificent Seven earnings growth drops to 43.2%. But that is hardly bad. More importantly, the other 493 companies in the S&P 500 produced 31.8% earnings growth.

Nvidia added another piece of evidence that the AI investment boom has not run out of fuel. There is plenty of demand for semiconductors and memory, but investors still need to distinguish revenue growth from returns on capital. Spending can be economically productive and still disappoint shareholders if the price paid for that growth is too high.

So “new highs” should not automatically be translated into “bubble.” Prices have risen, but so have profits. The higher-stakes part comes from what happens next. With the 10-year Treasury yield around 4.75%, oil above $90 and the Fed contemplating another hike, the cushion feels a little thin. Investors are asking companies to keep delivering exceptional growth while monetary policy may become more restrictive. Good fundamentals can justify high prices, but they cannot immunize them from disappointment.

Figure 3 Strong Earnings, Even After the Accounting Noise

Strong Earnings, Even After the Accounting Noise

Source: FactSet, August 28, 2026

The Fed: Not All Hikes Are Created Equal

Should investors fear a Fed that may hike? From 1994 through 2023, the median monthly return for the broad U.S. market was 1.4%. During the 51 months in which the Fed raised rates, the median return was 0.8%. The month following a hike, the median return was 0.9%. These numbers suggest that rate hikes are mostly harmless.

But there is an important difference between continuing an existing hiking cycle, restarting hikes after briefly holding rates steady, and reversing course after previously cutting rates. The last category is particularly relevant today. Since 1994, there have been only six instances when the Fed raised rates after its previous change in rates had been a cut. Stocks had a median return of -0.1% during those hike months and -4.2% in the following month. Five of those six following months were negative. Despite the tiny sample, the weakness is statistically unusual relative both to ordinary months and to the months following other types of Fed hikes.

By comparison, the 14 times the Fed paused during an existing tightening cycle and then resumed hiking were relatively benign. Stocks had a median return of 1.0% in the restart month and 2.0% the following month. Markets appear to care less about the direction of the latest quarter-point move than about what that move says about the direction of policy.

Figure 4 The Market Has Reacted Differently to Different Types of Fed Hikes

Median Stock Return Depends on the Type of Hike

Source: Fama-French U.S. market returns; Federal Reserve policy dates. January 1994 through December 2023. Reversal-hike sample contains six episodes

A Short and Tense Pause

The Fed last cut rates on December 10, 2025. It has since held rates steady at five consecutive meetings. If it hikes on September 16, only 280 days, or about 9.2 months, will have elapsed since its last cut. Among the six previous cut-to-hike reversals since 1994, the median pause was roughly 15.4 months. Only the 1998-99 reversal happened more quickly. This would be an unusually short pause, but not an unprecedented one.

It has also been a tense pause. In June, the FOMC deliberately removed language that had suggested an easing bias. In July, three policymakers dissented in favor of a hike. At Jackson Hole, Warsh emphasized that recent favorable inflation readings had not convinced him that the underlying trend had meaningfully improved. The Fed has not merely been waiting, it has been debating whether the easing that came before the pause went too far.

That complicates the diversification story. A September pause accompanied by improving inflation and a still-stable labor market could allow the equity rally to continue. A hike could bolster the Fed’s inflation-fighting credibility and ultimately help bonds, particularly if investors conclude that tighter policy today means less inflation tomorrow. But history does not say bonds must rally immediately. Following the six previous cut-to-hike reversals, the 10-year Treasury yield fell only half the time in the following month; the median change was actually an increase of about 5 basis points.

The better case for diversification is therefore not that one asset must win whenever the other loses. It is that stocks and bonds offer exposure to different versions of what happens next. If the Fed pauses and the expansion keeps lumbering along, stocks may have the advantage. If the Fed hikes and eventually slows growth and inflation, bonds may become the shock absorber. If an inflation shock forces both yields and policy rates higher, neither side is guaranteed an easy ride.

September: A Seasonal Speed Bump

September’s reputation as a rough one for investors is deserved. Using S&P 500 data since 1950, September has averaged a 0.6% decline across all years and a 0.8% decline during midterm-election years.

The more interesting part of the pattern may be what comes afterward. Since 1950, October has averaged a 3.0% gain in midterm years versus 0.9% across all years. November has averaged 2.8% in midterm years versus 1.9%. Midterm seasonality has historically looked more like a late-summer pothole than a year-end roadblock.

September seasonality is a reason to expect a bumpier ride, not a reason by itself to abandon the trip. Selling merely because the calendar changes has historically risked missing the stronger part of the midterm-year pattern that follows.

Figure 5 The Midterm-Year Pothole Has Historically Been Followed by a Rebound

Midterm Years: Weak September, Stronger October – November

Source: Yahoo Finance analysis of S&P 500 returns since 1950. Exact results vary by sample period and index

What This Means for Positioning:

1. A Fed reversal is a real risk. A hike would reverse the direction of monetary policy only nine months after the Fed’s last cut. Historically, those reversals have been much tougher for stocks than ordinary hikes, while Treasuries have not reliably rallied immediately.

2. Keep stocks and bonds working together. Diversification still matters, but the reason is protection across economic outcomes rather than a mechanical assumption that a hike helps bonds and a pause helps stocks.

3. Respect September without trying to trade the calendar. Midterm-year Septembers have historically been difficult, but October and November have been considerably stronger. Seasonality can help remind people of risks, but it is a poor substitute for focusing fundamentals.

6. New highs raise the stakes, not necessarily the risk. Earnings growth is strong enough to support much of the rally, but higher prices require continued delivery. With monetary policy, oil prices, inflation uncertainty, and labor markets lumbering along, disappointments may matter more at record levels than they did at lower prices.

September begins with stocks near records, a labor market moving in low gear, inflation improving too slowly for the Fed’s comfort, and yet profit growth is strong. New highs are good news; it’s just that they come with higher stakes.

This commentary is provided for informational and educational purposes only and does not constitute investment, legal, or tax advice, or a recommendation to buy or sell any security. Index performance figures are cited from third-party sources believed to be reliable but are not guaranteed; indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Historical event studies describe averages across different economic and market environments and should not be interpreted as forecasts. All forecasts and opinions are based on information available through August 31, 2026, and are subject to change.