Key Wealth Investment Brief

Key Takeaways:

The conflict in the Middle East is escalating and widening.

Over the past week, the fighting in the Middle East has continued to spread beyond the U.S. and Iran. The Houthis captured key areas that will allow them to tighten their grip on the Bab al-Mandeb Strait, a key alternative to the Strait of Hormuz. Additionally, a crucial oil pipeline in Saudi Arabia was shut down after being struck by a drone.

The continued attacks and difficulty of exporting have caused Saudi Arabia to lower its oil production to its slowest rate in more than three decades. As a result of the escalations, diesel rose to its highest price ever, and oil is reapproaching its cycle high, putting upward pressure on inflation.

Inflation is persisting, and bond yields are rising.

Last week, both the Consumer Price Index (CPI) and Producer Price Index (PPI) revealed inflation is persisting. Additionally, the Federal Reserve’s (Fed) preferred gauge, Core Personal Consumption Expenditures (PCE) inflation, has been above the 2.0% target for 65 consecutive months. All three reports are likely to suggest a 25-basis point (0.25%) interest rate increase at the Federal Open Market Committee (FOMC) meeting on September 16. However, inflation is increasingly being caused by supply shocks, which central banks across the world have less ability to influence, meaning there is increased uncertainty around the path forward for both inflation and interest rate policy.

As a result of the persistent inflation and uncertain path forward, bond yields have steadily risen around the globe. The 10-year U.S. Treasury yield is on the verge of breaking above 5.00% for the first time since 2007, and the 2-year U.S. Treasury yield experienced is largest weekly increase since Liberation Day in April 2025.

The range of outcomes for artificial intelligence (AI) has expanded.

A former AI researcher, who briefly worked at both Anthropic and OpenAI, posted a controversial statement suggesting that that there may be a 10% chance that AI becomes so powerful that humans could be at peril. At the same time, Nvidia’s CEO, Jensen Huang, declared the arrival of artificial general intelligence, which can match or surpass the cognitive abilities of humans and unleash tremendous innovation and unlock immense productivity.

The more negative announcements fueled concerns about the technology, leading to AI corporate executives agreeing to slow down the progress in AI models to ensure safety. Technology stocks pulled back following the announcement. Despite these concerns and the negative market reaction, we believe it is important to remember resiliency in the stock market has almost always been rewarded.

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification. To gain the desired diversification in a portfolio, we continue to emphasize the use of New Tools where appropriate. We also note that international markets also provide additional diversifying qualities and believe opportunities exist beyond large cap growth equities.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Equity Takeaways:

Stocks moved sharply lower in early Monday trading. The S&P 500 fell approximately 0.8%, while the tech-heavy Nasdaq fell 1.7%. Small caps were down 0.6%, and non-U.S. stocks were mostly lower.

The S&P 500 fell 0.9% last week, due to rising AI fears. The Index’s decline brought it below its 50-day moving average for the first time since July. Year-to-date the large-cap index is up 12.7%, while small-cap stocks are up 18.9%.

Earnings continue to power the S&P 500, as the Index’s earnings per share approaches $400. However, waning investor confidence has led the price-to-earnings multiple to fall to approximately 19x, approaching the level seen at the start of the Iran War. In an additional sign of recent stock market challenges, market breadth has turned negative and has remained below its 21-day moving average for the past nine trading days. However, in a potential sign of good news, stocks are approaching oversold territory, which suggests we are nearing an area where we should see significant buying interest.

Fixed Income Takeaways:

The yield curve experienced a bear flattening last week, as short-term yields rose by more than long-term yields. Specifically, at the short end, 2-year yields moved 26 basis points (bps) higher, closing the week at 4.63%; longer out on the yield curve, 10-year yields moved 19 bps higher to close the week at 4.97%, and 30-year yields moved 11 bps higher to close the week at 5.35%.

The rise in yields was likely caused by higher inflation readings in both the CPI and the PPI. Market participants are now pricing in more than a 90% chance of a 25-bps interest rate hike at the September 16 FOMC meeting.

In early Monday trading, yields were higher: 2-year Treasury yields were trading at 4.65%, 5-year Treasury yields at 4.81%, 10-year Treasury yields at 4.98%, and 30-year Treasury yields at 5.36%.

Investment Grade issuance has continued its record-setting pace. Markets are anticipating $215 billion of new issuance in September. 

Key Takeaways:

The labor market is showing signs of strength.

The U.S. added 162,000 non-farm payroll jobs in August, and the June and July data were revised higher by a combined 55,000 jobs, marking just the second time in 12 months that revisions were positive. These numbers point to a strong labor market that shook off potential signs of weakness earlier in the summer.

The composition of the labor market continues to see the impact of artificial intelligence (AI). Sectors most exposed to AI, such as information technology and professional and business services, have experienced a loss in jobs since the launch of ChatGPT, while sectors with less exposure to AI, mainly Health Care, have seen a significant rise. Other sectors linked to the build out of AI have benefitted, such as construction.

One sign of potential concern is the growth of wages. The year-over-year growth rate in average hourly earnings fell to 3.1% in August, which is lower than the overall Consumer Price Index (CPI) inflation increase of 3.4%. This dynamic means workers are losing purchasing power and could lead to a pullback in spending as more incremental spending will require dipping into savings.

Energy prices continue to rise, putting more pressure on the Federal Reserve.

Renewed tensions between the U.S. and Iran, as well as attacks by the Houthis on Saudi Arabian oil infrastructure, led to the price of oil rising 8% last week, bringing its year-to-date increase to more than 59%. Diesel prices reached a new all-time high at the end of the week, and the national average gas price rose to approximately $4.15 per gallon.

The renewed rise in energy prices will likely keep inflation well above the 2.0% goal of the Federal Reserve (Fed), putting more pressure on the Committee to raise interest rates in an effort to slow inflation. As of September 8, market participants are pricing in a 60% chance of an interest rate hike at the September 16 meeting.

Market concentration, in both domestic and international indices, continues to warrant monitoring.

The continued rise in mega-cap technology stocks has led to the Information Technology and Communication Services sectors combined to comprise nearly 50% of the S&P 500. The concentration is even more severe when looking at the top holdings in the Index. The top five holdings make up more than 30% of the Index.

This phenomenon is even more pronounced in the MSCI Emerging Markets (EM) Index, where the top two sectors make up more than 60% of the Index. The EM Index has also gone through a significant shift in the make-up of the country weightings within the Index, with Taiwan recently taking over as the largest weight. With concentration as high as it is within the EM Index, we believe it may be beneficial to take an active management approach in EM to lower some of the concentration risk.

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification. To gain the desired diversification in a portfolio, we continue to emphasize the use of New Tools where appropriate. We also note that international markets may also provide additional diversifying qualities and believe opportunities exist beyond large cap growth equities.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Equity Takeaways:

Stocks were mixed in early Monday trading. The S&P 500 fell approximately 0.1%, while the tech-heavy Nasdaq rose 0.3%. Small caps were down 0.4%, and non-U.S. stocks were lower.

The S&P 500 rose marginally last week, up 0.1%. Year-to-date, the large-cap index is up 13.6%, while small-cap stocks are up more than 21.0% We believe the strong performance by the smaller indices is a sign of a strong economic backdrop.

There has been a recent comeback in the Magnificent 7 (Mag 7) stocks. After underperforming the Forgotten 493 for almost the entire year, the Mag 7 have experienced a rally over the past two months. However, we maintain our belief that the Forgotten 493 are poised to continue their run into next year. For the past four years, year-over-year net income growth for the Mag 7 has significantly outpaced the Forgotten 493; however, that dynamic is expected to reverse in 2027, creating additional tailwinds for their outperformance.

International equities continue to outperform domestic equities year-to-date. Emerging markets are the top performer, up more than 26%, primarily driven by the semiconductor industry. International developed markets are up more than 14%, driven primarily by the financial sector.

Fixed Income Takeaways:

The yield curve rose last week, with the belly of the curve experiencing the largest change. Specifically, at the short end, 2-year yields moved 2 basis points (bps) higher, closing the week at 4.36%; longer out on the yield curve, 10-year yields moved 6 bps higher to close the week at 4.78%, while 30-year yields moved 3 bps higher to close the week at 5.24%.

The rise in yields was likely caused by Fed Chair Warsh’s comments at the Jackson Hole Symposium on August 28. Markets continue to view his comments hawkishly, with the chance of an interest rate increase at the September 16 meeting rising to approximately 60%.

In early Monday trading, yields were mixed: 2-year Treasury yields were trading at 4.37%, 5-year Treasury yields at 4.55%, 10-year Treasury yields at 4.78%, and 30-year Treasury yields at 5.23%.

Investment Grade and High-Yield credit spreads rose modestly last week, ending the week at 79 bps and 266 bps, respectively. 

Key Takeaways:

Structurally higher global inflation remains a central economic theme.

Last week, in his comments at Jackson Hole, Wyoming, new Federal Reserve (Fed) Chair Kevin Warsh drove home the point that inflation is a problem that needs to be addressed. He stated that controlling inflation is the Fed’s priority, and that current financial conditions are not restrictive, implying future rate hikes remain a possibility.

The current fed funds rate is the target range of 3.50% – 3.75%. There is approximately a 50% chance of a rate hike of 25 basis points (bps) at the September Fed meeting, according to Kalshi. Futures markets are pricing in approximately a 90% chance of at least one 25 bps rate hike before the end of the year.

Portfolio construction requires a new approach in the current inflation environment. Bonds are a less effective diversifier in higher-inflation regimes. New tools, such as alternatives and real assets, are necessary as a complement to both stocks and bonds.

The economy remains strong. Profits are surging, driven largely by artificial intelligence (AI) investment.

S&P 500 earnings growth for Q2:2026 surpassed 52% year-over-year, according to FactSet, an extraordinary rate. Even stripping out net unrealized gains from equity investments in Anthropic, Q2:2026 earnings growth for the S&P 500 was more than 30% year-over-year.

Recessions do not typically occur when profits are growing at this pace. That said, periods of booming profits are usually followed by periods of digestion. While we are optimistic about the benefits of AI in the long run, there is no guarantee that the massive investments being made will generate positive return on investment (ROI).

The range of outcomes from the AI buildout is large. The data center buildout is now larger than the internet buildout of the late 1990s and is poised to grow a lot larger, according to data from Apollo, FactSet, and Bloomberg. A wider range of possible outcomes argues for more widely diversified portfolios, all else equal.

Bottom line – how to invest now.

Discipline and diversification are prerequisites for prudent portfolio management. Real investors need real assets, U.S. investors need exposure to non-USD securities, and passive benchmarks are not to be accepted passively.

We expect volatility to remain elevated, and bonds may continue to struggle amidst an environment of rising inflation and interest rates. Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock-step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Equity Takeaways:

Stocks fell in early Monday trading. The S&P 500 fell approximately 0.4%, to 7679. The tech-heavy Nasdaq fell approximately 0.3%, while small caps fell approximately 0.6%. International shares were mixed. 

Global stocks remain solidly positive year-to-date (YTD), generally up 13–23%. Non-U.S. emerging market equities and U.S. small caps have led the way, each rising more than 20% YTD. 

The S&P 500 continued its recent hovering pattern last week. The market has been in a narrow trading range for the better part of the last month. The “summer doldrums” have crept into markets, but the intermediate-term path of least resistance remains higher.

Despite a generally positive outlook, complacency is a possible cause of concern. Implied volatility (VIX) has declined below 15, and September tends to be a weak seasonal period. Volatility usually picks up in front of midterm elections, but we do not recommend market timing as every cycle is different.

Breadth remains another possible cause of concern. The percentage of stocks making a new 20-day high has declined to approximately 9%, a relatively small number. Many stocks are just treading water.

Semiconductor weakness is a third possible cause of concern. After a very sharp rally early this year, semiconductors fell sharply, tried to rally, and the rally failed at the declining 50-day moving average. This chart action is textbook post-bubble price action and bears watching.

Fixed Income Takeaways:

Treasury rates were mixed in early Monday trading: 2-year Treasury yields were falling slightly, while longer-term rates were rising 3–5 bps. Overall, 2-year Treasuries were yielding 4.34%, 5-year Treasuries 4.50%, 10-year Treasuries 4.76%, and 30-year Treasuries 5.26%.

The Treasury curve flattened last week as 2-year yields rose approximately 11 bps in the week, while 10-year yields fell several bps. Much of this price action occurred after Fed Chair Warsh’s comments on Friday. Warsh’s comments were received hawkishly by bond market participants, driving up short-term Treasury rates relative to longer-term rates.

Investment-grade corporate bond issuance has been extremely heavy YTD. Despite heavy supply, spreads remain relatively contained. Spreads have drifted slightly wider, but investor appetite remains robust.

Key Takeaways:

Rising long-term bond yields are prompting intervention and putting confidence to the test.

Rising long-term bond yields remain in focus, and there are multiple reasons for their rise: sticky inflation, massive AI-related borrowing, continued economic momentum, and concerns over US fiscal health.

All are justified explanations in our view, but concerns over the US fiscal situation are among the most critical on a longer-term basis as it is directly linked to the quintessential role that confidence plays in stabilizing the global economy.

Treasury intervention could create unintended consequences.

Last week, Treasury Secretary Bessent attempted to fortify such confidence by doubling the size of its buyback plan to $4 billion focused on securities between 10 and 30 years initially causing yields to fall, only for them to reverse 24 hours later.

In response, the administration stated that the buyback program could become even larger, noting it has a “large toolkit” to address interest rates.

Further intervention, however, could cause the Treasury to interfere with monetary operations typically carried out by the Fed, and if the Treasury oversteps, paradoxically a further erosion of confidence could result.

The U.S. dollar has lost some ground, but a major decline is not our base case.

With respect to the dollar, it is accurate to state that the US dollar has “lost share” relative to other currencies and some of its “safe haven status” has been lost. But it would be wrong to conclude that the dollar is on the cusp of a major, sustained decline. Alpine Macro, for example, notes that global US dollar reserves have been stable, whereas other currency reserves have declined (China’s RMB), and other currencies are too small (the Canadian dollar). Modest dollar weakness is our base case, but a major dollar decline is not.

Bottom Line - how to invest now.

Investors should anticipate more volatility given rising oil/gas prices (again) possibly triggered by an “economic D-day” (8/24), NVDA’s earnings and the PCE report (8/26) and Warsh at Jackson Hole (8/28), along with renewed tariff tensions, weaker seasonals and upcoming midterms. Remain invested but remain disciplined and incorporate low volatility, real assets and international assets to improve diversification; buying bonds may prove to be contrarian.

Equity Takeaways:

Stocks edged lower last week, with the S&P 500 Index slipping 1.4%. US small cap stocks slightly underperformed, whereas non-US equities outperformed. For the year, US large stocks are up nearly 13%, US small caps have surged over 23%, and non-US stocks are higher by more than 17%, as measured by the MSCI All Country ex-US Index.

Stocks this year have benefited from spectacular earnings momentum. In the second quarter that ended June 30th, earnings rose nearly 54%. A considerable portion of this earnings boost came from unrealized gains in private investments held by tech giants Alphabet and Amazon.

Such gains aren’t likely to be sustained, however; even excluding these “paper profits”, earnings rose over 33% in 2Q:2026, according to Seaport Research Partners, a staggering jump. Moreover, earnings growth has been broad-based, with energy, materials, finance, utilities and industrial companies all posting double-digit earnings growth.

This week, equity markets will be focusing on earnings from another bellwether company (NVDA) which reports earnings on Wednesday. For a detailed preview, investors may want to review the following article: Wall Street Is Counting on Nvidia to Keep the AI Party Going.

Early Monday trading, stocks are down with the capitalization-weighted S&P 500 Index off -0.3%, the tech-heavy Nasdaq down -0.6%, and the equal-weighted S&P 500 Index unchanged, further evidence that stock market performance continues to broaden.

Fixed-Income Takeaways:

Despite considerable volatility during the week, bond yields were roughly unchanged last week: short-term 2-year treasury yields moved higher by 0.06%, whereas 10-year treasury yields moved lower by 0.01%.

For the year, however, yields are up appreciably: yields on the 10-year US Treasury have risen 0.57%, and yields on the 2-year US Treasury have increased by 0.76%, a reflection that bond traders are anticipating the Federal Reserve to raise interest rates in the future.

Credit spreads are a proxy for risk as they represent investors’ demand for compensation for assuming higher risk. Despite the above-mentioned concerns about the US fiscal condition and other worries this year, credit spreads have remained remarkably contained, further reflective of current economic conditions which remain strong. The GDP Now estimate for 3Q:2026, for example, is still hovering around 4%, per the Federal Reserve Bank of Atlanta.

Still, bond market volatility appears poised to remain elevated as anticipation surrounds Fed Chair Warsh's speech at a closely watched conference in Jackson Hole, WY, later this week.

Traders will focus on his comments regarding inflation, although many don’t expect him to specifically commit to raising interest rates in September. We believe a hold is more likely, tempered by upcoming releases. We also suspect that Warsh will pose several big questions without answering them, and link these to his external task forces.

As of 11 a.m. EST on August 24, long bond yields were lower by 3-4 basis points (0.03% - 0.04%), and gold was higher by roughly 1%.

Key Takeaways:

Calm inflation reports and a moderation in consumer spending helped drive equity markets to new all-time highs.

The July Consumer Price Index (CPI) release reported inflation rose 3.4% year-over-year, in-line with market expectations. While still well above the 2.0% goal, underlying components in the report point to a positive shift. The energy portion of inflation has fallen significantly in the past two months, declining 5.7% and 1.5% in June and July, respectively. Additionally, the Shelter component of CPI, which is the largest component in the calculation, has only experienced modest increases in recent months.

The producer side of the economy also saw prices moderate with the Producer Price Index (PPI) inflation falling to 4.7%, down from 5.5%. Consumer spending also saw a slight drop in July, falling 0.2% month-over-month. It was not a surprise to see the slight drop as June’s Retail Sales were boosted by the sales jump from Amazon Prime Day, as well as the tourism boost from the World Cup. All three of these reports helped lower the odds of an imminent rate hike, which helped stocks reach a new all-time high during the week. 

The worsening budget deficit is keeping long-term rates elevated. 

The U.S. Department of the Treasury reported a budget deficit of $432 billion for July 2026, wider than the budget gap of $291 billion in July 2025. The fiscal year-to-date deficit is $1.799 trillion, compared to $1.629 trillion during the same period last year. As the deficit continues to widen, the 30-year Treasury yield has risen to levels we have not seen since 2007. 

With bond yields expected to remain elevated, it is important to consider how this will impact the equity market. The impact on stocks differs depending on why interest rates are rising. There are times when higher bond yields are good for stock prices because it suggests the economy is strong, while there are times when it is bad for stock prices because rates are moving up too quickly and the economy is experiencing an inflationary surge.

Artificial intelligence (AI) is changing the economy, with serious implications.  

As a percentage of GDP, the ongoing datacenter buildout is now larger than the internet buildout in the late 1990s. The size of the housing boom in the late 1990s to early 2000s was notably larger than the AI buildout, but the growth in datacenters is occurring much faster. While there are currently no signs of the datacenter buildout slowing down, it is important to remember cycles do not last forever. Additionally, if AI demand disappoints, it could represent a sizable risk to the economy. It would likely not have as large of an impact as the housing crisis but could be larger than the unwind seen following the dot-com bubble. 

When stocks are high, investors should consider going low, as in low volatility.

With equity markets reaching new highs, while their concentration continues to grow, we believe it is an opportune time to consider adding a low volatility strategy to your portfolio, if appropriate. 

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification. To gain the desired diversification in a portfolio, we continue to emphasize the use of New Tools where appropriate. We also note that international markets may also provide additional diversifying qualities and believe opportunities exist beyond large cap growth equities.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock-step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Equity Takeaways:

Stocks were mixed in early Monday trading. The S&P 500 remained at approximately 7787, while the tech-heavy Nasdaq rose 0.3%. Small caps were down 0.3% and non-U.S. stocks were mostly lower.

The S&P 500 reached a new all-time high last week as the Index grew 0.4%. The Index was supported by calm CPI inflation and PPI inflation readings pushing down the chances of a rate hike at the September FOMC meeting. Year-to-date, the large-cap index is up 14.5%, while small-cap stocks have surged 25.8% year-to-date. Despite heading into September, which is historically the worst performing month of the year (and a pause would not be unexpected), we believe the market is set up to continue its move higher. The Index currently has a reasonable Price-to-Earnings (PE) multiple of approximately 20.0 times forward earnings. Additionally, the Cboe Volatility Index (VIX) is approaching its cycle lows, making downside protection and upside speculative positioning relatively cheap to implement.

Fixed-Income Takeaways:

The yield curve steepened last week, with short-term yields falling and long-term yields rising. Specifically, at the short end, 2-year yields moved 3 basis points (bps) lower, closing the week at 4.17%. Longer out on the yield curve, 10-year yields moved 4 bps higher to close the week at 4.69%, while 30-year yields moved 6 bps higher to close the week at 5.26%.

The drop in short-term yields likely occurred due to falling expectations of an interest rate hike at the September FOMC meeting. The calm CPI and PPI reports helped support this claim. The first rate hike is now expected in December. Long-term yields were likely pushed higher by the rising budget deficit. The 30-year Treasury auction last Thursday drew a yield of 5.22%, the highest we have seen since 2001.

In early Monday trading, yields were mixed: 2-year Treasury yields were trading at 4.17%, 5-year Treasury yields at 4.37%, 10-year Treasury yields at 4.70%, and 30-year Treasury yields at 5.28%.

Investment Grade and High Yield credit spreads widened modestly last week, ending the week at 79 bps and 265 bps, respectively. Both remain low by historical standards, especially the High Yields spread, which has a long-term average of 500 bps.