August saw global equity markets regain momentum as resilient economic activity and a broadly positive corporate earnings season helped offset continued geopolitical and inflationary uncertainty. Technology stocks recovered from July’s weakness as strong results reinforced confidence in demand for artificial intelligence infrastructure. However, markets remained selective, with investors continuing to assess whether elevated investment in AI will translate into sustainable long-term profits. Both growth and value stocks advanced over the month, while smaller companies also performed well as economic data remained supportive.
In the US, the S&P 500 rose 2.7%, supported by renewed strength in technology and another robust set of second-quarter corporate results. Semiconductor stocks rebounded following July’s sell-off, while software companies also performed strongly as earnings helped alleviate concerns that AI could disrupt established business models. Nvidia was among the most notable performers following another strong earnings announcement, although returns among the largest technology companies remained varied. The US economy also continued to show resilience, with the flash Composite Purchasing Managers’ Index reaching its highest level in more than four years
Despite the positive equity-market backdrop, the outlook for US interest rates remained uncertain. Inflation continued to run above the Federal Reserve’s target and policymakers maintained a cautious tone. At the annual Jackson Hole symposium, Federal Reserve Chair Warsh indicated that recent inflation data had not improved sufficiently, encouraging markets to consider the possibility that interest rates could remain elevated or even rise again. This placed some upward pressure on shorter-dated Treasury yields, although longer-dated bonds received support from the US Treasury’s announcement that it would increase the pace of bond buybacks.
UK equities delivered a more muted return following their strong performance in July. The market received some support from mining and energy companies as commodity prices advanced, although weaker consumer-facing shares and changing interest-rate expectations limited the overall gain. The domestic economic picture was mixed. Growth proved somewhat more resilient than anticipated, but inflation remained a concern, particularly given the risk that higher energy costs could feed into household bills and business expenses. This complicated the outlook for the Bank of England, with investors balancing encouraging economic activity against the possibility that monetary policy may need to remain restrictive for longer.
European equities made more modest progress than the US. Renewed technology momentum and exposure to internationally diversified industrial companies provided some support, but higher energy costs and expectations of tighter monetary policy weighed on sentiment. Government bond yields rose across much of continental Europe as European Central Bank officials adopted a more hawkish tone. French government bonds were particularly weak as investors began to focus on the forthcoming budget discussions, while the German 10-year government bond yield reached a new cycle high.
Japan was one of the strongest developed equity markets, with the broader TOPIX Index rising 3.9%. The market benefited from a softer yen, relatively supportive domestic fiscal policy and continued global demand for the technology and industrial equipment required for AI data-centre development. This represented a reversal of July’s weakness in technology-related Japanese shares. However, Japanese government bonds performed poorly as inflation and fiscal concerns led investors to bring forward expectations of another Bank of Japan interest-rate increase. The 10-year Japanese government bond yield consequently rose to a multi-decade high.
Emerging-market equities also performed well, rising 3.4% in US dollar terms and modestly outperforming developed markets. Part of this return reflected weakness in the US dollar, which increased the dollar value of returns from overseas markets. Taiwan was a standout performer as semiconductor shares recovered, while South Korea lagged despite announcements from several of its largest technology companies regarding increased dividends and share buybacks.
China was weaker following its strong advance in July. Economic data continued to point to subdued domestic demand, with manufacturing activity remaining under pressure and the property sector continuing to constrain the wider recovery. Select areas connected to AI, domestic technology and infrastructure investment attracted interest, but this was not sufficient to offset the broader concerns surrounding economic momentum. The divergence between China and the more technology-intensive parts of emerging Asia again demonstrated the importance of being selective within emerging markets.
Fixed income markets produced mixed returns. The Bloomberg Global Aggregate Bond Index gained 0.5% in US dollar terms, although outcomes varied significantly between countries and currencies. US government bonds generated a modest positive return and UK gilts also advanced, while continental European and Japanese government bonds came under pressure. Corporate bonds performed more strongly, particularly within high yield, as resilient economic data and positive investor sentiment caused credit spreads to narrow. The combination of attractive income and relatively healthy corporate fundamentals continued to support credit markets, although valuations became less generous following the rally.
Commodities advanced broadly during August. Precious and industrial metals performed strongly, with gold rising approximately 10% amid a weaker US dollar and renewed concerns surrounding the longer-term value of government currencies. Agricultural commodities also rose as adverse weather and geopolitical risks increased concerns about future supplies. Oil prices were comparatively range-bound around $90 per barrel despite continued tensions between the US and Iran, while European natural gas prices reached their highest level of the year as inventories tightened and energy infrastructure remained vulnerable to disruption.
Overall, August provided a more supportive environment for risk assets than July. Corporate earnings remained healthy, economic activity was resilient, and technology stocks recovered as enthusiasm surrounding AI infrastructure investment returned. Encouragingly, gains were not confined solely to the largest technology companies, with value stocks, smaller companies and emerging markets also advancing. However, inflation risks remained present, particularly given elevated energy prices, and central banks continued to push back against expectations of rapid monetary easing. Looking ahead, the sustainability of corporate earnings, the path of inflation and the response of central banks will remain important. With valuations elevated in parts of the equity market and government bond yields still volatile, selectivity and diversification remain essential.