August opened with the S&P 500 completing the breakout described in our last review. The index cleared the 7,577–7,581 resistance shelf that had rejected it six times, reached a record close of 7,777 on August 13, and then spent the following three weeks making progressively lower lows without establishing a defined support level.
The month’s central question was the one we posed in July: whether earnings, market breadth, and leadership would confirm the new highs. Earnings did. Breadth did not.
The Breakout and Its Aftermath
The August 4 close above the shelf was decisive, and the follow-through carried the index to consecutive records through mid-month. That portion of the advance was healthy.
Since August 13, however, the index has traded in a pattern of lower highs and lower lows without establishing a defined support level. The market did not break down — it stopped advancing, which is a different and more ambiguous condition.
The level that now defines the question is 7,771. A sustained move above it would re-establish the uptrend; continued failure there confirms that the August highs marked at least an intermediate top.
Rates Became the Dominant Variable
The bond market, not earnings, drove August.
Long yields rose sharply through the month. The 30-year Treasury reached 5.33% — its highest since 2007 — and the 10-year climbed above 4.75%, a level last seen in January 2025. Japan’s 10-year touched 3% for the first time since 1996, confirming that the move was global rather than domestic.
Three forces combined. Federal deficits continue to expand supply at the long end. AI-related corporate debt issuance may reach $1.5 trillion this year, adding further supply. And inflation, while stable, has not fallen: core PCE held at 3.3%, and Federal Reserve Chair Kevin Warsh used his first Jackson Hole address to describe inflation as running too high, without offering guidance on the path of policy.
The Treasury attempted to relieve the pressure, more than doubling its long-dated buyback operations from $2 billion to at least $4 billion. Yields fell for a single session before resuming their climb. At roughly $14 billion per quarter against a $32 trillion market, the buybacks were too small to alter the trend.
The mechanism matters for portfolio construction. Rising long-term rates compress the present value of distant cash flows, so long-duration equities — high-multiple growth and semiconductors — are repriced first and hardest. That is precisely what happened, and it explains the month’s sector performance without reference to any company-specific news.
Sector Rotation, and Why It Kept Reversing
Basic materials led every measurement period: up 5.7% on the week, 13.8% on the month, and leading three of four windows. Healthcare followed, leading the quarter at 15.8%. Energy has been the year’s strongest sector, up more than 40% year to date.
Technology, industrials, and utilities lagged, with technology down 4.5% over one week in late August. More significant than the direction of the rotation was its instability. Regional banks moved to breakout levels and reversed within days — three separate times. Gold miners broke above resistance and gave the move back within twenty-four hours. Steel names reached new highs and reversed within two sessions. Energy stocks rallied while crude declined, then declined while crude rallied.
This is the signature of capital rotating between sectors rather than committing to any of them. It is characteristic of a market redistributing risk, not one establishing new leadership.
Selectivity Within the AI Trade
Our July review argued that AI exposure alone would no longer suffice. August confirmed it, and sharpened the distinction.
Nvidia reported revenue of $96.2 billion, up 106% year over year, with earnings up 111% and gross margins expanding to 75%. Third-quarter guidance of $108 billion implied 89% growth. The stock rose, and the broader market closed lower the same day — an unusual and revealing divergence.
Dell reported earnings of $7.04 against $4.92 expected, with revenue above every analyst estimate and full-year guidance raised to $192 billion. Its AI server business is projected to triple to $74 billion.
Against those results, the memory and optical complex continued to deteriorate. Micron trades well below its June high. Coherent, Lumentum, Credo, and Marvell have declined materially and show no constructive base formations. Broadcom fell after its own earnings report.
The distinction is now clear. Companies converting AI capital expenditure into current revenue and earnings — Nvidia, Dell, Microsoft, Palantir — are being rewarded. Companies whose value depends on the continuation of that spending are not.
Quarter-End Repositioning
A further pattern emerged in the final week: institutional rebalancing ahead of the September quarter-end appears to be favoring names that lagged for most of the year.
Microsoft has recovered from 356 to above 512. Salesforce advanced 21% following its earnings report and is testing a breakout. Dell and Robinhood have both broken out on heavy volume. Simultaneously, the crowded AI positions — memory, optical, and several semiconductor names — have been sold.
Whether this reflects a durable change in leadership or temporary quarter-end positioning will not be clear until October. The distinction matters, because rebalancing flows frequently reverse once the quarter closes.
The Labor Market Complicated the Outlook
Employment data moved twice, in opposite directions.
The July report initially showed a loss of 23,000 jobs, which supported the case for the Federal Reserve holding rates steady and contributed to the early-August advance. That figure was subsequently revised to a gain of 21,000.
The September 4 report then showed 162,000 jobs added against expectations of approximately 55,000 — roughly triple consensus — with unemployment steady at 4.1%. Yields rose immediately, and market-implied odds of a September rate increase returned above 50%.
The labor market is therefore not weakening in a manner that would justify near-term policy easing, and the rate pressure that defined August has not been relieved.
Geopolitical Risk Remained Elevated
Hostilities involving Iran continued through the period. A ceasefire lapsed, the United States conducted strikes near the Strait of Hormuz, Iranian forces retaliated against bases in Jordan and the United Arab Emirates, and multiple commercial tankers were struck. Brent crude traded between $85 and $93.
For portfolio purposes, the important characteristic of this risk is that it is headline-driven. Energy equities have repeatedly rallied on escalation and given back those gains on reports of negotiation. Positions predicated on the conflict continuing carry the risk that a single diplomatic development reverses them in full.
Technical Position
The market’s technical condition is mixed and requires monitoring rather than conclusion.
As of September 4, the S&P 500 closed at 7,718, holding just above its 20-day moving average at 7,708 and comfortably above its 50-day and 200-day averages. The primary uptrend is intact.
The concern is not the trend but its internals. The index has made a series of lower lows since August 13 without defining support, and leadership has been unusually narrow — advances have depended on a small number of names rather than broad participation.
Until the market either reclaims 7,771 with wider participation or establishes a clear support level below, the appropriate description is consolidation with an unresolved outcome.
Outlook
The bull market has not ended, but its character has changed materially from the first half of the year.
The first half rewarded broad exposure to artificial intelligence and semiconductors. The second half is rewarding demonstrated earnings, and punishing multiple expansion — a distinction enforced by the bond market rather than by sentiment.
Three conditions would confirm that the advance can continue: a sustained move above 7,771 on improving breadth; stabilization or decline in long-term yields; and the emergence of at least one sector capable of holding leadership for more than a few sessions.
Conversely, three developments would indicate a more serious deterioration: continued lower lows with sustained failure at 7,771; the 30-year Treasury yield moving decisively above 5.35%; and a failure of the recently rebuilt leadership — Dell, Microsoft, Salesforce — to hold its breakout levels.
Bottom Line
August delivered record highs and the strongest corporate earnings of the year. It also delivered a nineteen-year high in long-term interest rates, deteriorating market breadth, and leadership that has not sustained itself beyond a few sessions.
The July review asked whether earnings, breadth, and leadership would confirm the new highs. Earnings have confirmed them decisively. Breadth and leadership have not.
Until that resolves, the appropriate posture is selective participation in confirmed opportunities, with a defined exit level on every position.