Usually, when we write about the CNN Fear & Greed Index, it is sitting at extreme levels—which, across its seven stock market indicators, suggests stocks are ripe for a pullback or a rally.1 Since the indicator's March 30 low, the market has rallied over 21% as of August 31.
This type of rally signals that the market has shifted from one extreme (fear, in this case) toward the other. Most people recognize that the past several months have been solid for equities. By the same token, many feel that risks are mounting—whether from AI concerns, interest rates, or geopolitical challenges. Fortunately, the index is currently sitting at a neutral reading. While sentiment can change quickly as investors climb the wall of worry, the index currently suggests the market has not yet crossed into dangerous territory.
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U.S. equities finished the week modestly higher. Investors spent much of the week balancing encouraging corporate earnings against renewed uncertainty surrounding the interest-rate outlook. Key developments included the July PCE inflation report, Federal Reserve Chair Kevin Warsh's remarks at Jackson Hole, and strong earnings from Nvidia. Together, these events provided fresh insight into the outlook for inflation, interest rates, and one of the market's most important growth themes.
The Federal Reserve Returned to Center Stage
After several weeks of encouraging inflation and labor market data, investors entered the week increasingly confident that the Federal Reserve could remain on hold for the foreseeable future. That view was challenged Friday when Fed Chair Kevin Warsh delivered his first Jackson Hole address and reinforced the central bank's commitment to returning inflation to its 2% target.2
While Warsh acknowledged that recent inflation reports have been encouraging, he cautioned that policymakers remain focused on underlying inflation trends rather than individual monthly readings. He reiterated that the Fed's inflation objective remains fixed and stressed that officials need greater confidence that inflation is moving sustainably lower before considering any change in policy.
Warsh also highlighted several areas of economic resilience, including consumer spending, business investment, earnings expectations, and labor market stability. Notably, he suggested that broader financial conditions are not currently restrictive, implying that policymakers may be comfortable maintaining a firm stance on inflation despite elevated interest rates.
The market response was immediate. Expectations for a potential rate increase later this year moved higher following the speech, pushing shorter-term Treasury yields higher as investors reassessed the outlook for Federal Reserve policy. The move reflected growing acceptance that interest rates may remain elevated for longer than markets had previously anticipated.
For investors, the key takeaway was a shift in perspective. Earlier this month, markets were focused on whether inflation was improving. Following Jackson Hole, the more important question became whether inflation is improving quickly enough to satisfy policymakers. The answer will likely play a significant role in shaping interest rates, Treasury yields, and market performance in the months ahead.
Inflation Data Provided a Mixed Message
Markets also digested the July Personal Consumption Expenditures (PCE) report, the Federal Reserve's preferred inflation measure. The data generally came in as expected, with inflation continuing to moderate from prior peaks but remaining well above the Fed's long-term target.3
The report did little to change the broader inflation narrative. While price pressures continue to moderate, progress has not been sufficient to eliminate expectations that interest rates may remain elevated for an extended period. As a result, Treasury yields remained a focal point throughout the week, with investors closely monitoring the impact of higher borrowing costs on financial conditions and valuations.
Strong Earnings Helped Offset Macro Concerns
While inflation and monetary policy dominated headlines, earnings season continued to provide important support for equities.
The week's standout report came from Nvidia, which delivered stronger-than-expected results and upbeat guidance. The report was particularly important because Nvidia has become a bellwether for AI-related investment spending across the economy. Strong results and guidance reinforced confidence that businesses continue to invest aggressively in AI infrastructure despite higher borrowing costs and ongoing economic uncertainty.
More broadly, second-quarter earnings results have continued to exceed expectations, helping offset concerns surrounding interest rates and inflation and providing a solid fundamental backdrop for equities.
Looking Ahead
The market enters September with two competing narratives. On one hand, corporate earnings remain strong and economic growth has generally held up despite elevated borrowing costs. On the other hand, inflation remains above the Federal Reserve's target, and policymakers continue to signal a willingness to adjust policy if necessary.
For now, interest rates remain the market's primary focus. While earnings and economic growth have remained resilient, last week's Jackson Hole symposium reinforced that the Federal Reserve is still focused on achieving its inflation objective. As investors look ahead, the direction of inflation and Treasury yields will likely remain the key drivers of market sentiment as the fourth quarter approaches.
