Nvidia Lifts Tech as Fed Risks Return

US equities finished the week moderately higher despite a late-week reversal in sentiment. The weekly gains, however, conceal a significant change in the market narrative. Thursday’s powerful technology rally following Nvidia’s earnings was partially reversed on Friday after Federal Reserve Chair Kevin Warsh used his first Jackson Hole keynote to signal that the Fed remains prepared to tighten monetary policy if inflation does not move convincingly towards its 2% target.

Nvidia Reaffirms the AI Investment Cycle

Nvidia provided the week’s strongest corporate catalyst.

The company exceeded second-quarter revenue and earnings expectations and, unusually, provided a longer-term forecast indicating approximately 70% revenue growth in its next fiscal year. The projection was substantially above prevailing market expectations and helped alleviate concerns that the extraordinary AI infrastructure investment cycle may be approaching a peak.

The positive read-through extended across the AI ecosystem, including Micron, Broadcom, Intel, CoreWeave and Nebius. Salesforce and CrowdStrike also rallied strongly following favourable earnings and outlooks.

The message from Nvidia is therefore relatively clear: demand for AI computing infrastructure remains exceptionally strong.

There is nevertheless an important qualification. Nvidia acknowledged that shortages of memory components could constrain industry growth, reinforcing the increasingly capital-intensive nature of the AI build-out.

The market is consequently moving beyond the question of whether AI demand exists. The next question is whether the enormous capital expenditure required to satisfy that demand continues to generate adequate returns.

Inflation Has Not Improved Enough for the Fed

The week’s macroeconomic message was considerably less comfortable.

July PCE inflation came in slightly hotter than expected, with headline inflation at 3.7% year-on-year and core inflation at 3.3%.

That set the stage for Chair Kevin Warsh’s Jackson Hole speech on Friday.

Warsh acknowledged the resilience of the US economy but argued that underlying inflation trends have not meaningfully improved. He indicated that the Federal Reserve would have additional work to do if inflation fails to move convincingly towards its 2% objective.

Markets reacted quickly. The implied probability of a 25-basis-point September rate increase rose from roughly 35% before the speech to around 58%–60% afterwards, while the two-year Treasury yield moved to approximately 4.31%, its highest level in about a month.

The US dollar also recorded its strongest daily increase in approximately two and a half months. This represents an important change from earlier in August, when softer employment data had encouraged investors to believe that the Fed could remain on hold.

The Fed’s message is increasingly that resilient growth is not sufficient justification for tolerating persistent inflation.

Market Breadth Deteriorates

The divergence between large technology companies and smaller companies was notable.

While the Nasdaq gained 0.8% for the week, the Russell 2000 declined 1.5%.

That makes economic sense. Large technology companies with substantial cash generation are generally better positioned to absorb higher borrowing costs. Smaller companies tend to be more dependent upon external financing and therefore more sensitive to changes in interest-rate expectations.

The divergence consequently suggests that this week’s advance was less broad-based than the headline S&P 500 performance implies.

Fund flows reinforce that interpretation. US equity funds recorded approximately US$22.3 billion of net withdrawals in the week through 26 August, the largest weekly outflow since March. Large-cap funds experienced approximately US$24.7 billion of withdrawals, while bond funds attracted US$7.1 billion.

Investors therefore remain willing to participate in specific growth themes, particularly AI, but broader risk appetite is becoming more selective.

Oil and Iran Remain an Inflation Risk

Geopolitical risk remains closely intertwined with the inflation outlook.

Iran’s Revolutionary Guards Navy stated on Friday that it maintains “full control” over the Strait of Hormuz, rejecting US assertions that the strategic waterway remains fully open. Iran indicated that restrictions would remain until the United States ends military actions against the country and meets related commitments.

The Strait remains one of the world’s most important energy transit routes.

Consequently, developments in the region have implications extending considerably beyond oil producers. Any renewed disruption capable of materially lifting crude prices would feed directly into the inflation debate confronting the Federal Reserve.

That makes energy prices one of the more important variables to monitor alongside employment and inflation data.

The Market Is Now Balancing Two Powerful Forces

The week’s developments illustrate the central tension facing investors.

On one side, corporate earnings, particularly across AI infrastructure, remain extremely strong.

On the other, inflation remains materially above the Federal Reserve’s target, increasing the possibility that monetary policy will need to become more restrictive.

This creates a more demanding environment for equities. Strong earnings can justify higher share prices. Higher interest rates reduce the valuation investors are willing to assign to those earnings.

The market’s direction therefore increasingly depends upon which of these forces dominates.

What to Watch Next (Beginning 31 August 2026)

Attention now turns towards the US labour market.

The coming week includes JOLTS job openings and ISM manufacturing data, providing an early indication of whether the weakness seen in July employment was temporary or part of a broader deterioration in labour demand.

The more important event will be the August employment report later in the week.

Following Warsh’s Jackson Hole comments, employment data have acquired additional significance. A strong labour report would reinforce the argument that the economy can tolerate tighter monetary policy and could further increase expectations for a September rate increase.

Conversely, another materially weak employment report would complicate the Fed’s position by placing its inflation mandate against increasing evidence of labour-market deterioration.

Investors should therefore pay particular attention to Treasury yields, the US dollar, oil prices and market breadth, rather than focusing exclusively on the headline equity indices.

The underlying equity backdrop remains constructive. Earnings growth remains strong and AI investment continues at exceptional levels.

But the hurdle has changed. The market now needs strong earnings and evidence that inflation can moderate sufficiently to prevent a sustained tightening cycle.

That makes September’s macroeconomic data considerably more important than the modest gains recorded by the indices this week.