Strong Earnings and Easing Oil Fears Drive Equities to New Highs, but Inflation Is the Next Test

US equities delivered a powerful rebound this week, with the major indices advancing sharply and the S&P 500 finishing at another record high. The rally reflected an unusually supportive combination of strong corporate earnings, easing concerns over Middle East energy disruptions and, late in the week, significantly weaker US employment data that reduced expectations for another near-term Federal Reserve rate increase.

For the week, the S&P 500 gained 3.6%, the Nasdaq Composite surged 5.2%, and the Dow Jones Industrial Average rose 3.0%. The Russell 2000 also gained 3.5%. Year-to-date, the S&P 500 is now up 13.3%, the Nasdaq 14.8%, and the Dow 12.4%.

The scale of the move was notable. Technology and semiconductor shares led the advance, while declining Treasury yields provided additional support to growth-stock valuations. The strength also came despite pockets of considerable volatility within the technology sector, suggesting that investors remain willing to take risk but are becoming increasingly discriminating at the individual-stock level.

A Weak Jobs Report Becomes Good News for Markets

Friday’s employment report was the week’s decisive macroeconomic development.

US employers unexpectedly shed 23,000 jobs in July, compared with expectations for an increase of approximately 80,000. Earlier employment figures for May and June were also revised lower by a combined 103,000 jobs. Treasury yields fell following the report, with the 10-year yield ending around 4.64%.

For equities, the immediate interpretation was favourable: a softer labour market reduces the urgency for the Federal Reserve to raise rates further.

Expectations for a September rate increase consequently fell below 50%. This is an important change from only a few weeks ago, when persistent inflation and higher energy prices had increasingly pushed investors towards expecting additional monetary tightening.

There is, however, an important qualification. A weaker labour market is supportive for valuations only to the extent that economic growth remains sufficiently resilient to sustain corporate earnings. If employment weakness develops into materially weaker consumption, the narrative could quickly shift from “less Fed tightening” to concerns over economic growth.

Earnings Continue to Provide Fundamental Support

Corporate earnings provided the other major pillar of the rally.

Results across the S&P 500 have generally remained strong, with earnings surprises extending well beyond technology into industrials, healthcare, energy and consumer-related businesses. Global fund-flow data also showed that corporate results continued to support investor sentiment, with companies including Amazon, Caterpillar and Palantir among those delivering strong results.

Yet the reaction to individual technology earnings demonstrated how demanding valuations have become.

AMD, for example, exceeded analysts’ earnings expectations but its shares nevertheless fell sharply as results did not meet elevated investor expectations surrounding AI. SpaceX experienced a similar reaction following its results. Semiconductor shares subsequently pulled back midweek after a strong run.

The lesson remains consistent with recent weeks: strong earnings alone may no longer be sufficient for highly valued AI-related companies. Investors increasingly require earnings, guidance and monetisation to exceed already ambitious expectations.

This creates an increasingly differentiated market where earnings execution matters more than simply having exposure to the AI theme.

Middle East Developments Remain a Major Macro Variable

Oil remained one of the most important cross-asset drivers.

At the beginning of the week, Brent crude fell sharply as signs emerged that US-Iran tensions could ease, immediately reducing concerns over energy-driven inflation. Equities rallied while Treasury yields declined.

Later developments were less straightforward. A proposed arrangement involving Iran and Oman regarding shipping through the Strait of Hormuz generated optimism over reduced disruption risks, although the geopolitical situation remains fluid. Oil consequently remained volatile during the week.

This remains particularly relevant for the Federal Reserve. Higher energy prices feed into headline inflation and can indirectly affect broader prices and inflation expectations. Consequently, geopolitical developments are currently influencing equity valuations not only through risk sentiment but also through their implications for monetary policy.

Technology Leads, but Leadership Is Not Uniform

Technology remained the principal source of market strength, with semiconductor shares particularly strong during the early part of the week.

Consumer discretionary stocks also benefited from Friday’s decline in Treasury yields, while healthcare received support from several positive earnings reports. Energy presented a more complicated picture: oil-price volatility created uncertainty for producers, but US refiners have benefited significantly from unusually strong refining margins resulting from disruptions to Middle Eastern fuel supplies.

Importantly, the broader market also participated. The Russell 2000’s 3.5% weekly gain indicates that the rally was not confined entirely to mega-cap technology.

That improvement in breadth is constructive. A rally supported by technology, cyclicals and smaller companies is generally healthier than one dependent upon a handful of mega-cap stocks.

What to Watch Next (Beginning 10 August 2026)

The most important event next week will be the July Consumer Price Index (CPI). Economists currently expect headline inflation of approximately 3.4% year-on-year, while core inflation is expected around 2.5%. The Producer Price Index and retail sales data will provide additional evidence on inflation and consumer demand.

The CPI report is particularly important because markets have just repriced the probability of another Fed increase following the weak jobs report. A softer inflation reading would reinforce the argument that rates can remain unchanged. Conversely, an upside inflation surprise could quickly reverse part of this week’s decline in Treasury yields and challenge elevated equity valuations.

Investors should therefore watch Treasury yields, oil prices and market breadth alongside the headline indices.

The broader market backdrop remains constructive. Earnings have been strong, participation has widened and the immediate risk of aggressive Fed tightening has diminished. However, after the latest rally, expectations are again elevated.

The next test is whether inflation allows the combination of resilient earnings and less restrictive monetary policy expectations to continue.