Stocks remain inversely linked to the price of crude oil. So, it is not surprising that this week’s bombing of Iran drove WTI crude futures to $90.66 (in after-market trading) and stock prices fell. However, the 419.02-point decline in the DJIA and 54.67-point decline in the SPX may seem like a mild response to what was a significant jump in energy prices. The charts on page 3 may help explain this lack of concern about the Middle East escalation.

Comparing 2026 to 2022

WTI is trading above $90 a barrel today, but it remains well below its peak of $123.70 a barrel recorded in March 2022. There was no war in the Middle East in 2022, but the conflict between Ukraine and Russia had begun in February 2022 and there was fear of oil shortages due to this conflict. However, a main issue impacting energy supply was the Biden administration’s green energy campaign and the restrictions it placed on fossil fuels. The Biden administration declared US oil production was at record levels in 2022, but this was inaccurate. US crude production was up from the anemic levels seen during the COVID shutdown, but it was not at record levels. According to the US Energy Information Administration (EIA), the average annual US production of oil was 11.91 million barrels per day in 2022, down from 12.29 million barrels per day in 2019. The US went from producing 15% of world crude production in 2020 to 14.6% in 2021 and 2022. In comparison, the EIA projects US 2026 production will be a record 13.8 million barrels per day, and this will represent more than 16.1% of total global crude production.

Rising energy and gasoline prices are what drove the CPI to 8.5% YOY in March 2022; however, this was only a stop on the way to the CPI’s 9.1% YOY rise in June 2022. In short, inflation problems were much worse in 2022 than they are today.

The 10-year Treasury bond yield jumped to 4.79% on this week’s war news. But it is the rise in global benchmark yields that is also spooking the fixed income market. Japan’s 10-year benchmark yield hit 3% the highest in 30 years, and British and euro bonds reached their highest levels in over a decade. The rise in the US 10-year Treasury yield is relatively modest in comparison since it remains below its 5.02% high made in October 2023.

Comparing Treasury bond yields in 2022 to current levels is complicated. The 10-year Treasury bond yield was only 2.4% in March 2022, but it was pegged to the fed funds rate that was zero at the start of the month. In early March 2022, the Federal Reserve had not begun to increase interest rates even though inflation had been running above 7% YOY for three consecutive months! The Federal Reserve finally raised rates in mid-March to a range of 25 basis points to 50 basis points. This started the US Treasury bond yield’s steady rise to 5.02% in October 2023.

Continuing our comparison, GDP declined 1.0% in the first quarter of 2022 and rose a mere 0.6% in the second quarter of the year. S&P trailing operating earnings grew 39.8% in the first quarter of 2022, or 31.3% after inflation, but this earnings gain was a rebound from negative earnings growth a year earlier. More importantly, positive S&P 500 earnings growth was not sustained in 2022, and operating earnings growth was negative 5.4% by the end of the year.  

In our view, the current rise in crude oil prices is substantial, but not as extreme as in 2022, and it is taking place in a very different environment. The crude price spike is apt to be temporary, particularly if the conflict in the Middle East is settled quickly. If not, oil production in the US and Venezuela may compensate for what might be lost from the Middle East. Iranian oil goes primarily to China, so China may be suffering the greatest risk if the conflict continues. In sum, crude oil and inflation are not as high as they were in 2022, and both are apt to trend lower in the longer run. The US economy and corporate profits are healthier today than they were in 2022 due to a business-friendly approach to fiscal policy. These are some of the reasons why the equity market is not panicking.  

But this does not mean there are no other things to worry about. Debt issuance by hyperscalers is also stressing the fixed income markets and the AI revolution is coming under heavy scrutiny. Data centers are facing a very harsh and public backlash. Analysts are worried that the $460 billion debt issued by major AI players, supplemented by an estimated $1.2 trillion in off-balance sheet lease commitments for future data centers, will not be justified by future revenues. Not surprisingly, the AI-driven momentum trade that powered stocks higher in recent quarters, suddenly unraveled in August. Some analysts may be concerned about this about-face in AI-related stocks, but we believe it is a good thing for the long run. For those worried about a stock market bubble, this AI skepticism is the opposite of what is seen at a bubble top.

Is Seasonality a Factor

Seasonality is not a perfect guide since stocks are constantly buffeted by a variety of unexpected factors. Nevertheless, the monthly seasonality reported in the 2015 Stock Trader’s Almanac has not changed significantly in the last 11 years. See page 4. Specifically, the weakest months of the year tend to be September, August, June, and February, in that order. Conversely the strongest months are December, November, April, and March, in that order. More recent data shows the weakest months tend to be the same, but best monthly performances in order are now November, April, December, and July. This seasonal pattern tends to be exaggerated in the midterm election year due to a normal pre-election selloff and a post-election rebound. This is not good news as we begin the month of September, but it does suggest a good buying opportunity may lie ahead.

Earnings Season Comes to a Close

As second quarter earnings season ends, we are surprised that consensus forecasts for this year and next continue to rise by dollars not cents. This week the LSEG IBES consensus earnings estimate for 2026 increased $0.57 to $362.26 and the 2027 forecast rose $2.45 to $412.46. The 2028 forecast increased by $3.60 to $470.50. The S&P Global consensus earnings estimate rose $1.00 for 2026 to $359.85 and increased $7.66 to $414.92 for 2027. These changes mean the market is now trading at 21.2 times the IBES 2026 estimate and 18.6 times the 2027 estimate. The forward earnings yield of 5.2% and dividend yield of 1.1% still compare favorably with a rising 10-year Treasury bond yield approaching 4.8%. Moreover, the estimated S&P Dow Jones 12-month trailing sum of operating earnings shows a gain of 29.9% YOY (it was 17.6% in December), which is far better than the 75-year average of 8.1% YOY. Forward operating earnings growth is currently 16.9% YOY. See page 5.

In terms of valuation, note that the current 12-month forward PE multiple is 17.6 times. This is below the long-term average of 17.9 times. And when this PE is added to current inflation of 3.4%, it comes to 21.0, which places it well within the normal range of 15.0 to 24.4. In short, stocks represent good value. The conflict in Iran may get worse before it gets better so we would wait to see what unfolds this week. Nevertheless, wars tend to be positive for earnings, so we remain bullish on equities.

Gail Dudack

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“Storms Make Trees Take Deeper Roots” – Dolly Parton

Some market environments are easier than others and in 2026 the daily ups and downs of the equity market have been predictably the inverse of crude oil. This held true again this week, despite a flurry of news that included a possible trade war with Canada, Treasury Secretary Scott Bessent announcing significant “D-Day” sanctions on Iran and the Treasury’s controversial announcement to double the size of Treasury buybacks.

After the 30-year Treasury bond yield spiked to a 19-year high of 5.3%, Treasury Secretary Scott Bessent announced a repurchase program for longer-dated Treasury securities that could potentially exceed $4 billion per issue. Secretary Bessent explained that this was to provide liquidity to the thinly traded long end of the yield curve and to help stabilize mortgage rates. As seen in the chart on page 3, the 30-year bond yield has been rising faster than the 10-year or 5-year. Bessent’s program will buy back long-term debt and replace it with short-term debt. This program is similar to “Operation Twist” which the Treasury initially launched during the Kennedy administration to stimulate the economy and was used by the Federal Reserve after the 2008 financial crisis to stabilize the banking system.

Although this is not an unusual operation, Bessent has been widely criticized by the press and prominent economists. We agree that government intervention in the debt markets rarely has any significant long-term effect, but Secretary Bessent acknowledged this when he said he was simply signaling the market during a quiet August period. We would note that the 30-year bond yield has been rising much faster than the rest of the Treasury curve and much of this is due to the huge issuance of corporate debt related to AI. There is little that Secretary Bessent can do about this debt issuance. Nevertheless, the 30-year yield is up 22 basis points since the end of June and the 2-to-30 yield curve has increased 100 basis points, while the 2-to-10 yield curve is up a mere 10 basis points. See page 3.

Despite the recent hysteria in the financial press regarding rising interest rates, rising federal debt, and the ineffectiveness of Treasury intervention, the current Treasury yield curve looks quite similar to the average long-term yield curve, although the current curve is less steep and yields are well below the historic averages. In short, the current curve is more favorable than the long-term norm. It is also worth noting that the 10-year Treasury yield, which is the normal benchmark for fixed mortgage rates, has been trading in a tight 14 basis-point range between 4.6% and 4.74% for the last four weeks. In other words, little has happened. See page 4.

But debt markets have been jittery due to massive bond issuance by major hyperscalers which now exceeds $220 billion in 2026 and is projected to hit $750 billion in the near future. In addition to these bond sales, hyperscalers have billions of dollars tied up in off-balance sheet commitments, long-term financing of infrastructure, and lease obligations. Many analysts question whether revenue at these hyperscalers will justify this massive investment. This concern is justified; but in our view, it also means Treasury debt should be the safe-haven asset.

The risk to our optimistic view is the buildup in federal debt. As of July, total gross federal debt reached $40.03 trillion. This received considerable attention, as it should, particularly since the cost of servicing this record debt is now more than $1.17 trillion annually and represents roughly 19% of total federal outlays. Nonetheless, this mountain of debt has not been Treasury Secretary Bessent’s doing, yet it did cause a stir when July’s monthly deficit of $432.3 billion reached 1.3% of GDP. The 12-month sum of deficits hit 6% of GDP at the end of July and this administration has been criticized harshly. But as Bessent indicated in his press conference, recent deficits are a result of tariff refunds mandated after the Supreme Court decision in February. These refunds, combined with a loss of corporate and personal tax revenue from the One Big Beautiful Bill, added to the deficit in recent months. The tariff paybacks are a one-off factor and the corporate tax deductions that materialized due to capital expenditures should be stimulative and provide efficiencies to the economy over the long run.

Looking ahead, tariff refunds are complete and new tariffs have been introduced that will produce revenues going forward. In short, federal deficits should moderate in the final quarter of the year. Still, it is worth noting that annualized deficits-to-GDP averaged 8% during the four-year Biden administration and this did not get any coverage by the press. The Trump administration inherited a debt-to-GDP of 7.2% in January 2025, and brought this was down to 5.2% as recently as May 2026. Secretary Bessent is the only Treasury Secretary in our recollection that had any plan for deficit reduction. Bessent’s goal is to get annualized debt-to-GDP to 3% and to generate GDP growth in excess of 3%. This would be a sustainable trend. We expect the Secretary will lower debt-to-GDP by year end. Meanwhile, the Congressional Budget Office (CBO) forecast, which is rarely accurate, has federal debt rising to 136% of GDP by 2036. But this estimate includes a slowdown in GDP, rising interest rates, and weaker employment. See page 5.

Despite the concern over rising long-term interest rates and the uncertainty of the Iran conflict, the S&P 500 index is trading a mere 1.5% below its record high. This does not surprise us since earnings have been stellar over the last twelve months. The current one-year trailing earnings growth rate has reached 29.6% YOY, as compared to the long-term average of 8.1% YOY. After adjusting for inflation, this growth rate is 26.2% YOY and the highest since March 2022. However, going back to 1948, earnings growth has only been this high or higher (excluding rebounds from a recession) in 2018 and 1988. The 1988 earnings rebound materialized after the Crash of 1987, which did not generate an economic recession, but did slow earnings growth, hence the rebound. The 2018 earnings peak was during the first Trump administration, and it followed the overhaul of the US tax code (Tax Cuts and Jobs Act of 2017) which strengthened the economy. While we believe the One Big Beautiful Bill has given a boost to the economy, the strength of the current earnings season should spur questions about whether we are approaching a peak in earnings growth. We believe this is likely, and as we wrote earlier in the year, it will become increasingly more difficult for companies to generate positive earnings surprises.

For a variety of reasons, the August/September months tend to be a tricky time for equity investors, and we expect this will be true in 2026, particularly since it is a midterm election year. But overall, we believe equities are supported by solid earnings and valuations are reasonable. We remain a buyer on weakness.   

This was a quiet week for economic news, but new home sales were down 6.3% YOY. The regional data was mixed showing sales falling in the Midwest and South but increasing in the Northeast and West. The inventory of new homes for sale was up 1.9% over the month to 488,000 units, representing 9.6 months of supply at the current pace of sales. The median price of a new home was $393,800, down from $397,300 a year ago. In sum, the residential housing sector remains weak and rising rates would be an additional handicap.

Gail Dudack

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Midterm years tend to be the weakest of the four-year election cycle, and the third quarter tends to mark the lowest point of the midterm year. Election uncertainty often weighs heavily on equities in the third quarter, but a relief rally generally materializes at year end. Historical patterns like this can be a useful guide and we think this historical tendency fits with the current environment.

As we approach September, not only are the midterm elections creating uncertainty, but the MOU with Iran has expired and the conflict in the Middle East is becoming chaotic. There are reports of ships in the Strait of Hormuz being attacked, Israel has targeted Hamas commanders in the Gaza Strip, the US Department of State initiated a $10 million reward for information on Iranian hackers accused of targeting the US and its allies, Iran has put a bounty on US troops, and the UAE has frozen trade with Iran. Reuters reports that Iran plans to escalate the conflict if the US does not “honor its deal” within weeks, but some experts feel this bravado means Iran is reaching the endgame. Not surprisingly, oil prices are on the rise with the WTI crude future now at $85.32. And as we have often said, $80 a barrel is pivotal and any move above $80 becomes a hurdle for equities.

Rising bond yields are also weighing on the market as the 30-year Treasury bond yield moves above 5%, its highest level since 2007. And rising long-term interest rates are a global trend. In Europe, Germany’s 10-year Bund yield touched its highest level since 2011, French OAT yields were at their highest point since 2008 and Britain’s 30-year gilt rate approached May levels, marking the highest rate since 1998. Two recent Treasury auctions also drew attention as a sale of 10-year notes cleared at a yield of 4.683%, the highest in 19 years, and a 30-year bond auction stopped at 5.216%, a 25-year peak.

Inflation fears tied to rising energy costs are driving interest rates, but it is also a combination of rising sovereign debt levels in the developed world, competition from corporate bond issuance, and the fact that many central banks are likely to keep interest rates higher for longer than expected.

In the US, the Treasury budget was $432.3 billion in July, up more than $40 billion from the deficit recorded in July 2025. For the fiscal year-to-date, the federal budget deficit was $1.799 trillion at the end of July, or about 10.5% larger than in the same period last year. After the Supreme Court struck down the emergency tariffs imposed by Trump last year, rising tariff refunds have put US public finances under unusual strain at the same time that the US is expanding its military budget. It is a bad combination.

Charts from Moody’s Analytics grabbed our attention this week. See page 3. The AI boom has supercharged semiconductor sales and the Semiconductor Industry Association reported that worldwide sales reached $403.3 billion in the second quarter, a stunning 35% increase from the first quarter. In line with this, SanDisk Corp. (SNDK – $1,625.78) has been the best-performing S&P 500 stock year-to-date, up a stunning 585% despite a 9% decline on August 18, 2026.

The Iran conflict and the price of oil will continue to dominate the financial backdrop, and a prolonged war is a worry since OECD inventories are at a 35-year low. The US Strategic Petroleum Reserve (SPR) fell to 298.7 million barrels in early August and is below 300 million barrels for the first time since the early 1980s. Add to this that there are many oil refining bottlenecks and most refineries are running at 95% capacity. Record-high refining margins, coupled with shrinking global product output have disconnected the cost of raw crude from the cost of refined fuels like diesel and gasoline. In short, there has been little relief to consumers even when oil prices decline. Keep in mind that these inventory and refining bottlenecks are not new problems, but they are becoming more critical as the Middle East conflict continues.

There was good inflation news in recent CPI, PPI, and import export price reports. In all cases, these reports show inflation is decelerating. In fact, core CPI was 2.5% in July, which is where it was at the start of the year. However, good news in July becomes a moot point if oil prices are rising.

July’s retail sales were not as strong as they were in June, but they did reflect a resilient consumer. Seasonally adjusted total retail sales rose 4.9% YOY in July versus 6.2% YOY in June. Real retail sales rose 1.9% YOY in July versus a gain of 4.9% YOY in June; nevertheless, July remained above the year-to-date average of 1.8% YOY. Without seasonal or inflation adjustments, July total retail sales grew 5.2% YOY, down from 8.5% in June, but remained above the year-to-date average of 5.1% YOY. The decline in July’s retail sales was concentrated in autos, gasoline stations, electronics, and nonstore retailers. The only negative in this report was the decline in nonstore retail sales, however, this followed four consecutive months of double-digit gains in nonstore retail sales. See page 5.

The housing market remains in a slump, and rising interest rates are apt to make this worse in the months ahead. Residential construction was weak in July with housing starts at 1.24 million (SAAR) and down 13.5% YOY. Single-family starts were 808,000, down 15.7% YOY. Permits were just slightly better at 1.4 million (SAAR), up 3.1% YOY and single-family permits of 894,000 were up 1.1% YOY. The pending home sales index was 71.2 in July, the lowest since January 2026’s 70.8 level. And finally, the August NAHB/Wells Fargo Housing Market Index was slightly improved at 35, up one point. Single-family sales rose 2 points to 39; next six-month sales were unchanged at 43, and traffic of potential buyers was also unchanged at 23. Overall, little has changed in residential housing. See page 4.

The Magnificent Seven tech stocks are currently facing skepticism, primarily the hyperscalers due to their massive data center expenditures. As a result, the group is no longer leading the market but is lagging. However, some companies face specific issues. In particular, a California federal court trial begins this week that could reshape the future of some of the most popular social media apps. A coalition of 29 states is suing Meta Platforms Inc. (META – $543.67) over claims that Facebook and Instagram were designed to be addictive and unsafe for children while also collecting and using children’s personal data. Meta and other social media companies like Snap Inc. (SNAP – $5.11), TikTok parent ByteDance and YouTube parent Alphabet Inc. (GOOGL – $344.20) are facing growing pressure from lawmakers. Yet despite these issues, S&P 500 earnings continue to grow and as a result, equity valuations remain solid. The market is now trading at 21.3 times the LSEG IBES 2026 estimate and 18.7 times the 2027 estimate. The 12-month forward PE multiple is 18.2 times and just above its long-term average of 17.9 times. When this PE is added to inflation of 3.4%, it equals 21.5, which places it well within the normal range of 15.0 to 24.4. See pages 6 and 7. In sum, we remain a buyer on weakness.

Gail Dudack

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Hopes for a US-Iran peace deal wax and wane and with that ebb and flow, the price of crude oil falls or rises. As we have often stated, a price below $80 a barrel for WTI intermediate crude is good for both inflation and the stock market whereas a price above $80 a barrel is apt to be a hurdle for stocks. This is proving to be true in terms of the equity markets daily action. And it is probably one of the most important variables for the intermediate term.

Meanwhile, President Trump is waiting for the US naval blockade and economic sanctions to break down Iran’s IRGC until the Iranian government can no longer pay soldiers — hoping they revolt. But this strategy could prove risky. The IRGC is not a political party. It does not face a midterm election, and it does not live by a Western moral code. This waiting game could become a bigger problem in coming months for President Trump. But for investors, it is simple. It all depends upon the price of oil.

However, while geopolitics is messy and unpredictable, the earnings picture for the S&P 500 index continues to amaze us. The LSEG IBES consensus earnings estimate for 2026 increased $6.06 last week to $359.60 and the 2027 forecast rose $1.11 to $408.83. The consensus 2028 forecast increased $2.50 to $463.70. The S&P Dow Jones consensus earnings estimates were equally impressive with the 2026 estimate rising $2.84 to $357.78 and the 2027 forecasts increasing $2.16 to $405.90. Although we raised our earnings estimates a mere five weeks ago (“Raising Estimates” – July 7, 2026) to $350 and $400.75 for 2026 and 2027, respectively, due to the spectacular performance of second quarter results we are raising them once again. Our new estimates for 2026 and 2027 are $360 and $410 and we would not be surprised if these forecasts also get reviewed after third quarter earnings season.

In our Outlook for 2026 (December 24, 2025) we estimated earnings of $315 for the S&P 500 and indicated that an unchanged PE multiple (which was then 26 times) would equate to an S&P target of 8190. When we raised our earnings forecasts in July we noted that “the current trend in earnings, without multiple expansion, suggests a target of roughly SPX 8350 in December 2026.” We believe this latter target continues to be true, particularly when WTI futures are trading below $80 a barrel.

The equity market is now trading at 21.6 times the IBES 2026 estimate and 19.0 times the 2027 estimate. Furthermore, the forward earnings yield of 5.0% and dividend yield of 1.1% remain competitive even with a 10-year Treasury bond yield of 4.7%. S&P Dow Jones indicates that trailing earnings show a gain of 29.3% YOY. (Earnings expectations were for a 17.6% gain as recently as December.) This 29.3% is 3.6 times better than the 75-year average earnings of 8.1% YOY. Note that forward operating earnings growth is currently forecasted to be 21.4%, which means earnings growth will decelerate but remain impressive. See pages 8 and 9.   

Most economic data releases have been favorable for the economy, but last week’s jobs report was not. July’s employment report was a major disappointment with a loss of 23,000 jobs. Plus, previous months were revised down by a total of 103,000 jobs. And despite these losses, the household survey unemployment rate fell from 4.2% to 4.1%. The establishment report and household report are different surveys. The household’s decline in the unemployment rate was due to an estimated 265,000 loss in the civilian labor force, which is the sum of the 178,000 drop in the number of people unemployed, and a decline of 87,000 people employed. Meanwhile, the civilian noninstitutional population increased by 116,000. This combination of a rise in population but decline in the labor force resulted in declines in both the monthly participation rate and employment population ratio. July’s job losses were concentrated in government (53,000), leisure & hospitality (40,000), retail (20,000), and financial (14,000) sectors, according to the establishment report. Job gains were seen in the healthcare and construction sectors. See page 3.

Year-over-year gains or losses in employment in the two BLS surveys are our favorite ways to measure the health of the job market. However, the household survey has become very inconsistent due to annual revisions. The household survey’s year-over-year change in employment jumped significantly in January 2025 and fell dramatically in January 2026 as a result of annual Census Bureau corrections. In the month of January 2026, this adjustment included changes back to April 2020 and the entire revision was incorporated into the January 2026 estimate. The introduction of population controls in this BLS data makes it impossible to compare household survey estimates over time. The 2026 Census Bureau annual adjustment included updated demographic information from the 2020 Census, a departure from the “blended base” methodology introduced in recent years, as well as updated information on net international migration. Although the household data is messy, we find the steady declines seen in this survey — now showing a decline in employment of 0.6% YOY — to be worrisome. See page 3.

The labor force participation ratio fell from 61.5 to 61.4 in July and the employment population ratio declined from 59.0 to 58.9. But more importantly, the longer term trend shows both ratios have been declining since the 2023 highs of 62.8 and 60.4, respectively. While labor participation peaked in 2023, the data shows that the total labor force peaked in 2025. This latter statistic could be the result of several factors, including voluntary deportations of illegal immigrants and aging baby boomers moving into retirement. See page 4.  

BLS data on foreign-born and native-born employment shows that foreign civilian population peaked at 50.4 million in March 2025. In the same month, the foreign civilian labor force peaked at 33.7 million, and foreign employment peaked at 32.2 million. The data shows that since March 2025 foreign employment has declined by 1.7 million, and the foreign population has plunged by 23.3 million. In short, this supports our theory of why the labor force peaked in 2025. Note that in July 2026, the unemployment rate for foreign-born workers fell to 3.3%, well below the national average of 4.1%. See page 5.

It is rare for the ISM manufacturing index to outperform the nonmanufacturing index, but that is what occurred in July 2026 for the first time since March 2021. The manufacturing index increased from 53.3 in June to 55.6 in July, while the nonmanufacturing index rose only slightly from 54.0 to 54.1. Also, the ISM nonmanufacturing index for employment fell to 47.4 in July, below the breakeven 50 level, which is a worrisome sign for the service sector. Conversely, the employment index in the manufacturing survey rose to 52.8 in July. The best news in the nonmanufacturing survey was that production jumped from 55.4 to 59.1 in the month and six of nine components rose in the month – although one of those was prices paid. See page 6.

There was little change in our technical indicators this week, but the bias remains bullish. Our view of buying on weakness is unchanged.

Gail Dudack

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