Before the dawn of the 24/7/365 world fueled by information overload, August was a month when the pace of life slowed down. Vacations were taken to the beach or to the mountains to get away and recharge. People disconnected from their daily grinds and enjoyed time away with family or friends. Investment markets also slowed down, with fewer people on trading desks and fewer big deals announced. Well, forget all that now. With global connectivity everywhere (thanks Starlink) and a never-ending news cycle requiring constant attention, August is just as busy as any other month on the calendar for most investors.

The past month was filled with swings in sentiment caused by a series of data releases and announcements that kept market watchers tied to their news feeds. After two lackluster months, U.S. equities started to rally on strong earnings announcements from some of the biggest technology companies, showing that the AI trade was still alive. The resiliency of this theme had been in question due to concerns about the impact of massive capital spending funded by increasing debt issuance. Knowing that not all AI darlings will still shine forever, investors have become more discerning in analyzing the potential winners / survivors in the new AI world.

While equity markets showed renewed fight, the global bond markets were where the bears showed their teeth. What had been percolating in the background over the last few months became the big story of August. A combination of mildly concerning inflation readings, oil price jumps caused by increased saber rattling in the Strait of Hormuz, and central bank policy debates focused the discussion on global interest rates. Around the globe, interest rates rose and expectations increased for more central bank activity. Faced with the challenge of not wanting to constrain needed economic growth but also the push to drive inflation lower (or at least keep it from rising further), central banks have become more vocal about potential moves. In the U.S., new Fed Chair Warsh was more hawkish in his comments at the annual Jackson Hole economic summit, emphasizing that inflation is not slowing fast enough. While he did not commit to raising interest rates, preferring to be more data dependent, the markets reacted quickly and priced in a likely rate increase in September. Pair this with Treasury Secretary Bessent’s announcement about increased U.S. debt buybacks to better manage liquidity and volatility, and interest rate discussions took center stage for much of the second half of August. Interestingly, the reaction of U.S. bond markets was rather tepid, having already seen interest rates rise 30+bps since June.

Overseas markets experienced a similar level of volatility, driven by many of the same factors. In Japan, there was a coordinated effort with the U.S. Treasury to intervene in the Yen currency market. While it was viewed by many as a weak action that was quickly reversed, it did highlight an elevated concern about currency levels around the globe. The ECB and Bank of England both held rates steady in August but were more vocal about the risks of inflation remaining above targets and potential future actions.

August investment performance reverted back to the trends of the spring with large cap growth stocks leading the way in the U.S. The S&P 500 rose 2.7% while the Russell 2000 rose 1%. Non-U.S. developed market stocks rose 2% and emerging market stocks increased by 3.4%. U.S. bond markets delivered 0.4% in August, despite the concerns over rising interest rates and potential policy rate hikes. During the month, the U.S. 10YR Treasury yield rose 5bps.

Here are observations on what occurred across market segments in August:

Broad Market Performance¹

Domestic Equity²

• U.S. large cap equities posted solid gains in August, with the S&P 500 advancing 2.7% and the Russell 1000 up 2.8%. Growth outpaced value at the large cap level, with the Russell 1000 Growth gaining 3.7% versus Russell 1000 Value at 2.0%.

• Mid and small cap stocks lagged their large cap counterparts in August. The Russell Mid Cap returned 1.9% while the Russell 2000 trailed at 1.0%. Growth modestly outperformed value within mid and small caps.

International and Global Equities³

• International developed markets participated in August’s rally, with the MSCI EAFE gaining 2.0% and MSCI World up 2.6%. Value underperformed growth within EAFE, returning 1.5% versus 2.6% for growth. Small cap international stocks were a relative bright spot, with MSCI EAFE Small Cap up 3.8%.

• Emerging market equities gained 3.4% in August, outperforming developed international markets. Value and growth returns were nearly identical within EM. China returned -0.3% and continued to weigh on the broader index.

Fixed Income Markets⁴

• The U.S. bond market delivered modestly positive results in August, with the Bloomberg U.S. Agg returning 0.4%. High yield and leveraged loans outperformed investment grade, returning 1.0% and 0.9% respectively, reflecting stable credit spreads and supportive risk sentiment.

Specialty Markets⁵

• REITs struggled in August, with the DJ All REIT and S&P Global REIT indices returned  -2.7% and -3.0% respectively, pressured by rate sensitivity. Commodities were a standout performer.

Sectors⁶

• Sector performance was bifurcated in August. Energy (7.0%), Information Technology (6.3%), Materials (6.0%), and Health Care (4.9%) led all sectors. On the other end, Utilities (-4.8%), Industrials (-2.6%), and Communication Services (-1.2%) were the primary laggards.

The dog days of August were anything but this month. Equity markets recovered from a period of doubt about the sustainability of the AI theme as investors took advantage of the brief sell-off earlier in the summer. The last few years have shown that investors will gravitate back towards what has worked well for so long when sentiment and momentum falter briefly, particularly when the fundamentals for the leading stocks remain strong and optimism high. The bond market continues to carry the pessimistic load, weighed down by concerns about stubborn inflation and ever-increasing government debt loads ($40Trillion in the U.S.). Since the start of 2026, the market has vacillated about the next Fed move, shifting from cuts to on hold to now increases. While Chair Warsh did not come out and explicitly state what the next move will be, many interpreted his comments to read “I just might” raise rates if the data paints the right picture.

For investors in this type of environment, staying focused on the long-term objectives and goals of their investment plan is most important. While absolute levels of volatility have remained in normal ranges, trying to predict the next market swing can be very challenging. Recent data shows that elevated inflation levels may be impacting some consumer behaviors, though the overall economy remains strong with stable employment levels and reasonable forecasted GDP growth. With the mid-term elections approaching, be prepared for more noise in the markets.

^1-6 All data referenced in the table and comments supplied by Morningstar as of 8-31-2026

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