It has been quite a week on Wall Street, and for once, that phrase carries an almost entirely positive connotation. After a two-month summer slump that saw the S&P 500 slide nearly 5% from its early June peak due to a combination of Iran-war inflation fears and hawkish Fed rhetoric, the bulls are now well and truly in charge. The S&P 500 surged 1.79% on Tuesday, 4 August, to close at 7,737, which marks its first record high in two months. Meanwhile, the Dow Jones Industrial Average soared more than 900 points to close above 54,000 for the first time in its history. By Friday, the S&P had extended those gains to close at a fresh record of 7,756, with the Nasdaq Composite adding 1.29% to settle at 26,690. The recovery has been broad, rapid, and crucially, it's been underpinned by a convergence of positive catalysts that couldn't have come at a better time, with blowout earnings, easing oil prices on Strait of Hormuz diplomacy, and an astonishingly upbeat July jobs report that landed at the ideal moment. Whether the good times can last, however, is a rather more complicated question.
Two themes have dominated the week's action and together tell the full story of where US equities stand heading into the back half of August: the remarkable resilience of corporate earnings, and the ongoing, unresolved tug-of-war between inflation and the Federal Reserve. In this piece, we'll try to look at both as we plot where the markets could be headed in the medium term.
The earnings engine that could
The corporate earnings backdrop has been, by almost any measure, exceptional. As of 31 July, 86% of S&P 500 companies that had reported were beating earnings per share expectations, which is well above the historical average. In fact, the blended earnings growth rate is on pace for its highest reading in five years, according to FactSet. By Friday, 7th of August, of the 436 S&P 500 companies that had reported, 85.1% had topped analyst expectations, according to LSEG, which contrasts with a long-run average of just 68% since 1994. Yet for all the headline strength, the week's earnings season also served up some sharp reminders of how unforgiving the market has become toward any company that fails to meet the moment. SpaceX dropped 13% after its first earnings report as a public company, as AI spending concerns overshadowed its Q2 overperformance. This was a telling reaction, and it perfectly encapsulates the market's shifting mood on the AI capital expenditure cycle. AppLovin tumbled nearly 20% on mixed quarterly results, Western Digital shed 13% on a disappointing first-quarter forecast, and Salesforce fell 3% after announcing a leadership shuffle, while SanDisk dropped more than 6% on uninspiring results.
The week's other notable trend was the continued broadening of the market beyond the Magnificent 7. Healthcare and financial stocks, which carry heavy weighting in the Dow, outperformed technology across June and July, helping keep the blue-chip index near record territory while the Nasdaq struggled through its habitual summer slump. That rotation is both a sign of market health and a quiet warning. What we're seeing is the AI-concentration trade that powered 2025's extraordinary gains being redistributed into a wider range of sectors, which can only be good for overall market health.
Jobs, the Fed and a September wildcard
If the earnings season provided the kindling for this week's rally, the July jobs report is what really lit the fire. Non-farm payrolls unexpectedly fell by 23,000, which is well below the Reuters consensus forecast of an 80,000 gain. At the same time, previously reported gains for the two prior months were revised sharply lower, and the unemployment rate dipped to 4.1% as workers left the labour force in droves. In the perverse logic of a market obsessed with the Federal Reserve's next move, bad news for the economy turned out to be very good news for stocks. Traders in the Federal Funds Futures market cut the probability of a September rate hike from 55% on Thursday to 45% following the release, with the 10-year Treasury yield retreating to 4.64% from 4.75% the prior week.
Under new Fed Chair Kevin Warsh, who has made a point of abandoning the Fed's tradition of forward guidance and leaving markets to hunt for signals in every data point, the jobs number was as clear an indication as investors have received in months. Investors are simultaneously navigating the start of Warsh's tenure and stubborn inflation that has prompted bets that the Fed will continue to hold rates steady, or even move to hike them, in the months ahead. The coming week brings July CPI and PPI data, which will be the next definitive test of whether Friday's relief is the beginning of a sustained Fed pivot narrative or merely a temporary reprieve. Bank of America has also noted that August to October is historically the S&P 500's weakest three-month period. This seasonal headwind, combined with the AI earnings reality check and the ever-present possibility of a Middle East flare-up, suggests the record highs of this week may be harder to hold than they were to reach. However, we'll have to wait to find out for sure.
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