Stocks finished higher today, with the Dow up 0.98%, S&P 500 up 0.86%, Nasdaq up 0.96%, and Russell 2000 gaining 0.45%.
The rebound snapped four straight declines for the S&P 500 and Nasdaq, although both indexes still finished lower for the week. Market breadth also improved for the first time in five sessions.
Semiconductors, technology hardware, industrials, airlines, homebuilders and retailers were among the stronger areas. Most of the Magnificent Seven finished higher.
The bigger surprise was that stocks rallied despite an inflation report that strengthened the case for another Fed rate hike. Short-term Treasury yields moved higher, but WTI crude fell 2.4% after eight consecutive gains, providing some relief after the recent surge in energy prices.
Inflation Comes in Hotter Than Expected
August inflation was the day’s most important economic release.
Core CPI rose 0.3% for the month, slightly above expectations and up from July’s 0.2% increase. Headline CPI rose 0.4%, reflecting the recent increase in energy prices.
Shelter costs accelerated modestly, while airfare, used vehicles and several other categories also moved higher.
The encouraging part is that annual core inflation still fell to 2.4%, its lowest level since 2021. But the month-to-month acceleration suggests that the Fed cannot yet declare the inflation problem solved.
Markets now see roughly an 85% probability of a rate hike at next week’s Fed meeting, up considerably from a week ago.
Oil Finally Pulls Back
Energy provided some relief. WTI crude fell 2.4%, ending an eight-session rally that had pushed oil back above $100 per barrel.
The decline followed reports that Gulf officials and Iran are expected to discuss a temporary arrangement for managing traffic through the Strait of Hormuz. Any agreement that improves the flow of oil through this critical shipping route could reduce some of the supply fears that have driven prices sharply higher.
There are still significant risks. Diesel prices have now climbed above $6 per gallon nationally, and disruptions across the Middle East and other major refining regions continue to pressure global fuel supplies.
That means energy remains an important inflation risk even after today’s decline in crude.
AI Demand Continues to Run Ahead of Supply
The AI investment story remained another important source of market support.
Oracle reported 30% revenue growth and a 120% increase in its cloud infrastructure business, while its remaining performance obligations, or contracted future revenue, reached $664 billion.
The company also highlighted another roughly $30 billion of new AI contracts.
Elsewhere, Microsoft reportedly plans to more than triple its data-center capacity to address computing shortages, while OpenAI paused new Pro subscriptions amid exceptionally strong demand for its latest Astra model.
These developments reinforce a theme we have seen repeatedly this earnings season: demand for AI computing capacity remains stronger than the industry’s current ability to supply it.
Oracle shares nevertheless declined modestly, another reminder that strong fundamentals do not always translate into immediate stock gains when investor expectations are already extremely high.
Consumers Are Growing More Cautious
There was a less encouraging message from consumers.
Preliminary University of Michigan consumer sentiment fell sharply to 47.8, well below expectations and close to the weakest readings of the year.
Consumers also expect inflation of 4.6% over the next year, up significantly from 4.0% last month.
Higher fuel prices are likely playing an important role. Even if households do not directly purchase diesel, higher trucking and transportation costs can eventually work their way into grocery prices and other everyday expenses.
That makes the recent energy shock increasingly relevant not only to the Fed, but also to consumer spending.
Here’s Our Take
Today’s rally was notable because stocks managed to rise despite an inflation report that made a September Fed rate hike substantially more likely.
Part of that resilience reflects the continued strength of the corporate backdrop particularly in AI. Oracle’s results, Microsoft’s planned capacity expansion and extraordinary demand for OpenAI’s latest model all suggest that the AI infrastructure cycle remains very much intact.
But investors should not lose sight of the growing macroeconomic tension.
The economy remains resilient, AI spending is booming and employment is healthy. At the same time, inflation is still above target, energy costs have surged and consumers are becoming less confident.
That combination gives the Fed room, and increasingly a reason, to tighten policy again.
Today’s decline in oil provided some welcome relief, but one day does not reverse the recent energy shock. The next question is whether oil and diesel prices stabilize enough to prevent another wave of inflation from spreading through the economy.
For now, markets appear willing to tolerate another Fed hike as long as economic growth and corporate earnings remain strong. That may become the key test for the rest of the year: not simply whether rates rise again, but whether the economy and earnings can continue absorbing higher rates without breaking.
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