The Numbers Don't Match the Feelings

The market shrugged off bad inflation news... Eyes on Warsh's Friday speech... The disconnect between hard data and how folks feel... More evidence of the 'K-shaped economy'... Nvidia reports earnings... The AI trade is counting on it...

Inflation has stopped 'cooling'...

This morning, the federal government's personal consumption expenditures ("PCE") data showed that inflation rose 3.7% year over year in July. That matched the inflation rate from June... And prices rose 0.2% month over month.

Both of those readings were slightly higher than Wall Street was expecting.

Core PCE, which strips out food and energy prices, rose 3.3% year over year in July, matching Wall Street's estimates.

PCE inflation remains below May's three-year high of 4.1%. But after the pace eased in June, it held steady in July. And each of the past five months of PCE readings is above any month since May 2023.

While energy prices are to blame for headline PCE, core PCE is just as "sticky." Like the headline reading, core PCE rose 3.3% in both June and July. And the past five months of core PCE are higher than any month going back to October 2023.

Investors shrugged off the news...

Higher-than-expected inflation didn't move the markets much today. Investors are looking for clues about how the Federal Reserve will react, and they aren't getting that from slightly elevated July PCE numbers.

Investors still expect the Fed to raise interest rates this year to cut inflation. CME's FedWatch tool shows that futures traders have priced in around a 40% chance of a hike in September and 75% chance of at least one hike in 2026.

There's plenty else to keep the market busy.

The Iran conflict is still simmering. Iran's Revolutionary Guard said that it had reached a deal with Oman on how the countries would divide the Strait of Hormuz if it reopens. (Iran says it's waiting for the U.S. to accept its demands.)

Meanwhile, a report from Axios indicated that the U.S. plans to focus on economic pressure against Iran – rather than bombing – until the midterm elections. So we shouldn't prepare for the conflict to end anytime soon.

And for folks trying to predict the fed-funds rate, the main event comes later this week...

Over to you, Kevin...

On Friday, Fed Chair Kevin Warsh will be speaking from the Kansas City Fed's annual meeting in Jackson Hole, Wyoming. And while market expectations for interest rates are just about the same as they were earlier this week, inflation will be the main focus.

In both of his policy decisions as chair, Warsh's Fed has left interest rates alone. But the central bank's statement has put its goal bluntly: "The committee will deliver price stability."

So we know which way the Fed is leaning. And while inflation is off its highs from earlier in the summer, it's still well above the Fed's stated 2% goal.

Meanwhile, the economy is still growing...

Today also brought news about America's second-quarter GDP, which rose 1.5% year over year.

This is the Bureau of Economic Analysis' second estimate of the country's economic output. It matched the bureau's "first read" to confirm the fifth straight quarter of GDP growth.

And for the third quarter, the Atlanta Fed's GDPNow predicts 4.6% year-over-year growth. If that's the case, the economy would be growing at the fastest rate since the third quarter of 2023.

As our colleague Mike Barrett told his Select Value Opportunities subscribers this morning, "It's boom time for American businesses." More from Mike...

S&P Global's flash U.S. Composite Purchasing Managers' Index ("PMI") rose from 54.5 in July to 56 in August. A reading above 50 signals that the private sector is expanding. And the higher the figure is above 50, the faster the growth.

This index blends underlying surveys of purchasing managers in manufacturing and service (knowledge-intensive) businesses. It provides a snapshot of economic activity for the entire private sector.

And August marks the fastest acceleration in domestic business activity since April 2022.

As long as that remains the case, it'll keep the "stagflation" fears at bay – even if inflation remains elevated.

But consumers aren't feeling the boom...

That's what we saw in yesterday's Consumer Confidence Index report from the Conference Board research group. It reported the lowest economic sentiment since January.

All three components of the Conference Board's Expectations Index fell, and the total Expectations Index sits at one of the lowest levels since the "tariff tantrum" in April 2025. Respondents were the most pessimistic when they looked six months out.

Not all consumers are in the same boat, though.

Last week, we noted that Treasury Secretary Scott Bessent dismissed the idea that we're in a "K-shaped economy," in which wealthy folks' fortunes improve at the same time that other folks struggle more. As we wrote in the August 17 Digest...

In a television interview last week, Bessent pointed to recently reported 5.5% year-over-year wage growth for the lowest quartile of full-time workers. Meanwhile, weekly pay for higher earners only grew 1.5%. He described that as a "C-shaped economy."

"The lower end of wage earners are finally calling it back," Bessent said. We're not so sure.

The latest Consumer Confidence numbers reinforce our view. Households making more than $100,000 per year reported feeling more optimistic about the economy.

On the other hand, those at lower incomes are at – or even below – their pandemic-era pessimism lows. Take a look at this chart from the Conference Board...

Historically, consumer confidence and the stock market have moved in lockstep. But in recent years, that hasn't been the case... Most Americans are getting more and more pessimistic, while the market has soared to new highs.

At some point, we expect the markets to wake up to all the issues facing consumers (like rising debt loads, higher delinquencies, and relying on "buy now, pay later" loans). But for now, AI is the main story.

AI looks to Nvidia's earnings for support...

This evening, chipmaking giant and AI darling Nvidia (NVDA) released its second-quarter earnings. We'll have a full breakdown of the numbers – and what they mean for the AI ecosystem – in tomorrow's Digest.

Since Nvidia is the largest public company by market cap, any news will have an outsized impact on the overall stock market... and even more so on fellow AI and semiconductor names.

Since peaking on June 22, the iShares Semiconductor Fund (SOXX) has fallen more than 20%. For comparison, the Nasdaq 100 Index is "only" down about 4% over the same time frame.

The story is the same for the entire AI ecosystem... The Global X Artificial Intelligence & Technology Fund (AIQ) is still down 10% from its June highs.

Nvidia is the largest component of the SOXX – making up about 9% of the ETF – and it makes up about 3% of AIQ. Nvidia is also the largest component of the S&P 500, with a 7% weighting.

Good news from Nvidia's earnings could rekindle the AI trade. Anything less could spark further sell-offs.

For the broader market, it's less significant. The Equal Weight S&P 500 Index is less than 1% off its all-time high. So outside of the mega-cap tech names, stocks are healthy.

But for the AI ecosystem, Nvidia's earnings are as important as ever. Between OpenAI's employee exodus, the ChatGPT parent's money-losing business, and the blowup of the "Situational Awareness" hedge fund, investors need some good news from Nvidia if AI is going to fuel the next leg of the bull market.

New 52-week highs (as of 8/25/26): Altius Minerals (ALS.TO), BHP Group (BHP), Bristol-Myers Squibb (BMY), Alpha Architect 1-3 Month Box Fund (BOXX), Quest Diagnostics (DGX), Ero Copper (ERO), Freeport-McMoRan (FCX), Global X MSCI Greece Fund (GREK), Ideaya Biosciences (IDYA), Illumina (ILMN), Lonza (LZAGY), Match Group (MTCH), Newmont (NEM), Pfizer (PFE), SSR Mining (SSRM), Twist Bioscience (TWST), Visa (V), and Vanguard FTSE Europe Fund (VGK).

In today's mailbag, feedback on yesterday's Digest – and its title... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"... yeah, thems fightin words. Bugs Bunny – 'Them's Fightin' Words!'" – Stansberry Alliance member G.F.

Corey McLaughlin comment: Glad you got the reference.

Regards,

Nick Koziol
Baltimore, Maryland
August 26, 2026