Outlook
Large-cap valuations (measured by the S&P 500) have remained elevated above historical averages, driven by the market's high expectations for mega-cap earnings growth since roughly 2020.1 In contrast, small-cap valuations (measured by the S&P 600) have stayed much closer to historical norms. Over the past 12 months, however, small caps have notably outpaced large caps by over 10% (31.1% for the S&P 600 vs. 20.7% for the S&P 500 as of 8/14/2026) [see image above]. We believe this shift likely stems from two overlapping drivers: bargain-hunting investors taking advantage of attractive small-cap multiples, and a broader recalibration of relative earnings growth expectations between large and small companies. This dynamic is beginning to narrow the valuation spread between the two asset classes. A gradual convergence that trims excess froth from high-multiple equities—while underlying earnings and economic growth remain intact—we view as a healthy, constructive market development.
. . . U.S. equities delivered modest gains as investors responded positively to encouraging inflation data and continued earnings strength. While market performance was relatively modest, investor sentiment improved as both consumer and producer inflation came in at or below expectations, easing concerns that the Federal Reserve may need to resume raising interest rates. Inflation Data Helped Ease Market Concerns The week's primary focus was July inflation data. Both the Consumer Price Index (CPI) and Producer Price Index (PPI) came in at or below expectations, providing further evidence that inflation pressures continue to moderate. While inflation remains above the Federal Reserve's long-term target, the reports suggested that price pressures are moving in a more favorable direction than many investors had feared. For investors, the importance of the data was less about the current level of inflation and more about its implications for future monetary policy. After renewed concerns about inflation earlier this summer, the latest readings provided reassurance that inflation is not accelerating and continues to move in the right direction. Markets Reassessed the Federal Reserve Outlook The inflation reports carried added significance following the Federal Reserve's July meeting, where policymakers maintained a cautious tone and several members expressed concern about persistent inflation. Combined with last week's softer labor market data, the latest inflation readings reinforced the view that the Fed may be able to remain on hold while continuing to evaluate incoming economic data. As expectations for additional rate hikes moved lower, investors became increasingly comfortable with the view that the Fed may remain on hold for the foreseeable future, providing support for broader equity valuations. Earnings Season Continued to Provide Support Although inflation and Federal Reserve policy dominated market attention, earnings season remained an important source of support. According to FactSet, 86% of reporting S&P 500 companies exceeded earnings expectations, while 76% surpassed revenue estimates. The index remains on pace to deliver its strongest earnings growth since 2021.2 With most companies having now reported second-quarter results, earnings season generally confirmed that businesses have remained resilient despite elevated interest rates and ongoing economic uncertainty. Strong corporate results continue to provide a solid fundamental backdrop for equities as investors navigate an evolving economic and policy environment. Looking Ahead Recent inflation data has helped reassure investors that price pressures continue to move in the right direction, reducing concerns about additional Federal Reserve tightening in the near term. Combined with a strong earnings season, this has supported confidence in both the market and the broader economic outlook. Looking ahead, investors will remain focused on incoming inflation data and any signals from Federal Reserve officials regarding the path of monetary policy. While inflation remains above the Fed's long-term target, moderating price pressures and resilient corporate earnings continue to provide a favorable backdrop for long-term investors. | 
