U.S. equity funds saw their largest weekly outflows in five months, intensifying the market's focus on the Federal Reserve's next move. A robust earnings season from chipmaker NVIDIA and software giant Salesforce.com (NYSE: CRM) fueled a solid rebound in the tech sector this week. However, hawkish comments from Fed Chair Warsh at Jackson Hole dampened sentiment into the close. With a pivotal U.S. jobs report due next week and key leaders speaking at the G20, the sustainability of the AI-driven rally hangs in the balance.
The week was packed with economic data, highlighted by the latest PCE inflation report. While the headline figure met expectations, the core PCE rate climbed to 3.3% year-over-year, remaining well above the Fed's target. The labor market remains sturdy, with initial jobless claims falling to 203,000, a decrease of 4,000 from the previous week. Continuing claims also dipped to 1.778 million, a drop of 18,000. The Atlanta Fed's GDPNow model revised its Q3 GDP tracking estimate up to 4.6% from 4.0% last week, driven by stronger consumer spending forecasts.
Market pricing for a rate hike jumped following Chair Warsh's debut speech at the Jackson Hole symposium, which was widely interpreted as hawkish. Warsh stated that achieving price stability is the Fed's primary duty and that current policy is not yet sufficiently restrictive. He emphasized that there is not yet enough evidence to declare victory on inflation, though he acknowledged the economy's resilience. He also suggested that the Fed could meet its goals more effectively by communicating less.
Analysts at Oxford Economics noted three hawkish signals in Warsh's remarks: his explicit endorsement of PCE as the Fed's key inflation gauge, his suggestion that current policy lacks restrictiveness, and his observation that disinflation is proceeding too slowly. Following the speech, the yield curve flattened as short-term rates rose and long-term yields fell. Futures markets now price in a 58% probability of a rate hike at the September FOMC meeting, with a fully priced-in move for December.
Deutsche Bank commented that Warsh's clearly hawkish stance surpassed expectations, suggesting that only a significant miss in upcoming data could prevent a 25 basis point hike in September. Their baseline scenario now calls for a total of 50 basis points in hikes across the September and December meetings. Bob Schwartz, a senior economist at Oxford Economics, was more cautious, stating he has not yet incorporated a hike into his baseline forecast. He pointed to easing price pressures in core goods and a more positive trend in services inflation, suggesting the Fed may prefer to let the market tighten financial conditions on its own, potentially reducing the need for a move if forthcoming data remains mild.
U.S. equities experienced a volatile week, with NVIDIA's (NASDAQ: NVDA) optimistic long-term revenue guidance offset by Warsh's hawkish tone. The tech sector led gains, rising 1.8% for the week, according to Dow Jones data. Communication services added 1.6%, financials gained 1.1%, and consumer discretionary edged up just 0.1%. Salesforce.com was the week's top tech performer, surging 22% after reporting better-than-expected adjusted earnings and revenue for its fiscal Q2 while also raising its full-year 2027 guidance.
On the downside, healthcare and energy sectors both fell 2%, industrials dropped 1.7%, and real estate slipped 1.3%. Consumer staples, materials, and utilities also closed the week lower. Investor sentiment turned cautious, with LSEG Lipper data showing net outflows of $22.3 billion from U.S. equity funds in the week ending August 26, the highest in nearly five months. Large-cap funds bore the brunt, with investors actively trimming exposure to big-cap tech names in favor of small and mid-cap stocks.
Barclays noted that while the Q2 earnings season was strong, the market faces potential headwinds ahead. "Solid earnings are still supporting equities, but the market is facing potential risks: elevated macro volatility, concerns about capital supply for AI, and unfavorable seasonal factors before the midterm elections," the bank said. Charles Schwab, in its market commentary, observed that NVIDIA's strong long-term guidance and Salesforce.com's impressive results boosted sentiment towards AI-related trades. Looking to next week, the firm is cautious, pointing to the G20 innovation ministers' meeting where NVIDIA CEO Jensen Huang and OpenAI CEO Sam Altman are scheduled to give keynote addresses. The firm believes investors are not overly fearful of a September hike itself but are more wary of the ripple effects on global bond markets.
The 30-year Treasury yield has retreated roughly 13 basis points from its cyclical high of 5.31% seen last week, partially aided by the Treasury's buyback program, though the overall threat remains. With September historically being the weakest month for the S&P 500, Charles Schwab has adopted a cautious outlook for the week ahead.