Stocks rose in August despite higher long-term interest rates, persistent inflation, and continued trade uncertainty. Strong corporate earnings helped offset those concerns, reinforcing an old lesson for investors: markets rarely wait for the economic picture to become clear.
August did not hand investors a clean story. Oil traded in a range, tariffs kept arriving under new legal authorities, and long-term interest rates climbed to levels many investors have never seen in their working lives. Stocks rose anyway.
That combination is more common than it feels. Investors rarely get the luxury of certainty. The month ended with major indexes higher and the same unresolved questions still sitting on the table. For a long-term investor, the useful response is not to handicap each of those questions one by one. It is to hold a portfolio built around your own plan, so those questions can stay unresolved without costing you anything.
Key data points for August
- The S&P 500 rose 2.6 percent, the Nasdaq 3.9 percent, and the Dow Jones Industrial Average 1.3 percent. So far this year they are up 12.3 percent, 13.5 percent, and 10.7 percent.
- Volatility fell. The CBOE VIX index finished August at 16, below its long-term average, after touching 21 in July.
- Developed markets outside the U.S. returned 1.8 percent in dollar terms on the MSCI EAFE Index. Emerging markets returned 3.2 percent on the MSCI EM Index.
- The 30-year Treasury yield hit its highest level since 2007, ending August at 5.24 percent. The 10-year finished at 4.75 percent. The Bloomberg U.S. Aggregate Bond Index returned 0.4 percent for the month.
- Oil stayed in a range after climbing in July. Brent crude closed at $90.68 per barrel and WTI at $86.27.
- The U.S. Dollar Index ended August at 99.43. Gold closed at $4,437.38 per ounce and silver at $66.58.
- The second quarter GDP revision left growth unchanged at an annual rate of 1.5 percent.
- Payrolls fell by 23,000 in July against a forecast gain of 80,000. The unemployment rate ticked down to 4.1 percent.
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Long-term yields are near levels last seen almost twenty years ago
Interest rates have stayed higher for longer than many expected, and that colors nearly everything else in this market. The 30-year Treasury yield briefly passed 5.3 percent during August, a level not seen in almost twenty years. The 10-year, near 4.8 percent, is close to its own recent peak. Rates can feel like a technical subject, but they are not. They shape the economy and they reflect it at the same time.
Higher rates are usually read as bad news for markets, but the reason behind the move matters. For several years, rising inflation drove yields higher. More of the recent increase has come from higher real yields, which is another way of saying that inflation-adjusted returns on bonds have improved. That has tended to accompany an economy that is still growing, and it helps explain why yields and stock prices have been near their highs at the same time.
For a portfolio, higher yields cut in two directions at once. New money put to work in bonds buys more income than it did five years ago. Bonds already owned lose value as rates rise, which is why the Bloomberg U.S. Aggregate Bond Index has been close to flat for the year. Neither fact is good or bad on its own. What matters is what the bond allocation is being asked to do in your plan, and whether the maturities you own line up with when you actually need the money. That is a core question in portfolio construction, not a market call.
Inflation has not come down to where the Fed wants it. The headline Personal Consumption Expenditures Price Index stood at 3.7 percent year over year in July, and core PCE at 3.3 percent, both well above the 2 percent target. At the Fed’s annual Jackson Hole symposium in late August, Fed Chair Kevin Warsh signaled that a rate hike could arrive sooner than expected. Markets are now pricing in at least one hike this year and possibly two by early next year. Market pricing is a snapshot of expectations, not a forecast, and it has been wrong in both directions before.
Earnings growth reached almost every sector
The S&P 500 reached new all-time highs in August, and earnings were the reason. Second quarter results came in well above expectations across a wide range of sectors. Analysts now expect S&P 500 earnings of roughly $349 per share by year end, and growth of 15 percent in each of the next two years, against a long-run average closer to 7 percent. Those are forecasts. They change, sometimes sharply, and a shortfall against a high bar is usually harder on prices than a shortfall against a low one.
What stands out is not the headline number but how widely the growth was shared. Nine of the eleven S&P 500 sectors grew earnings by double digits year over year, and a tenth grew more modestly. Contributors included artificial intelligence infrastructure spending, higher oil prices, and steady growth across the broader economy. Breadth like that suggests profitability is coming from more than a narrow group of very large companies. A broader base of earnings has historically been more durable than growth concentrated in a handful of names, though one quarter of breadth does not guarantee the next.
Steady earnings are one reason broad market valuations have held up over the past year. The S&P 500 trades near 20 times earnings against a long-run average closer to 16, though it has come down from its own recent peaks. Valuations tell you very little about the next few months. Over long periods they have mattered more, because the price you pay sets the starting point for the return you earn. In a market priced above its long-run average, that argues for staying deliberately diversified rather than concentrating in what has worked most recently. We treat portfolio rebalancing as a discipline for that reason, not as a reaction.
Trade policy is still unsettled
Tariffs were back in the news in August, with tensions rising between the U.S. and several trading partners, Canada included. The Supreme Court struck down last year’s Liberation Day tariffs in February. New tariffs were then implemented under different statutes, including Section 301 of the Trade Act of 1974. Those have since expired, and others have been put in place under still different authorities, each with its own rules. At the same time, the government is refunding the original reciprocal tariffs, with $129 billion already accepted for processing by U.S. Customs and Border Protection.
The severe outcomes forecast when the tariffs first landed have not shown up. Businesses reorganized where they buy from, repriced where they could, and took costs out elsewhere, which muted the inflation that higher input prices might otherwise have produced. That adaptation has limits, and it does not mean the risk has passed. The legal ground keeps shifting, the rules differ by statute, and tariffs look likely to stay an open question for global markets well beyond this year. Businesses with thin margins or concentrated supplier relationships remain the most exposed.
What this means for your portfolio
Investors who stayed put through August were rewarded. That is not a strategy, and a few things deserve attention as the fourth quarter approaches.
Portfolios drift after a strong run. Gains of 10 to 14 percent across the major indexes mean an allocation that began the year on target may now carry more equity risk than it was built for. It may also be more concentrated in its largest positions. Trimming back has a tax cost, which is why the selling decision and the tax decision belong in the same conversation. A sensible rebalance depends on capital gains tax planning to keep it from becoming an expensive one.
Higher yields also change the arithmetic for anyone drawing income. Bonds are generating meaningfully more income than they have in years, which can reduce how much a retiree needs to sell from equities in a weak market. That matters directly to retirement income planning and sequence of returns risk, which is the risk that poor returns early in retirement do lasting damage even if long-run averages hold up.
None of this calls for a forecast on tariffs, the Fed, or the next earnings season. It calls for knowing what each part of your portfolio is there to do, and for making the changes that your own plan warrants rather than the ones the month’s headlines suggest. August was a reminder that the loudest story of the month is rarely the one that matters to a portfolio. Earnings and bond yields are both working in favor of long-term portfolios right now, and both can turn. Staying grounded in the plan remains the most reliable way to work toward the goals behind it.
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Frequently Asked Questions
Why did stocks rise in August when interest rates were climbing?
Corporate earnings did most of the work. Second quarter results came in well above expectations, and ten of the eleven S&P 500 sectors reported year-over-year earnings growth. Rising rates can pressure stock prices, but when the increase reflects higher real yields in a growing economy rather than an inflation scare, stocks and yields have at times risen together. That relationship is not fixed and has broken down in other periods.
What does a 30-year Treasury yield above 5 percent mean for my bonds?
Two things are true at the same time. Bonds you already own fall in price when yields rise, which is why the Bloomberg U.S. Aggregate Bond Index has been close to flat this year. New money invested in bonds locks in more income than it could five years ago. Whether that is a net positive depends on your time horizon and on when you need to spend the money, not on the direction of rates alone.
Should I be concerned that stock valuations are above average?
Above-average valuations are worth knowing about, but they are a poor timing tool. The index has been trading around 20 times earnings, against a historical norm nearer 16. Historically, higher starting valuations have tended to accompany lower long-run returns, though the range of outcomes is wide and the relationship says almost nothing about the next year. The practical response is broad diversification rather than a decision to exit.
Is the Federal Reserve going to raise rates again?
Markets are currently pricing in at least one rate hike this year and possibly two by early next year, following comments from Fed Chair Kevin Warsh at the Jackson Hole symposium in late August. Inflation supports that expectation, with headline PCE at 3.7 percent and core PCE at 3.3 percent in July against a 2 percent target. Market pricing reflects expectations at a moment in time, and it has moved substantially in both directions over the past several years.
How worried should I be about the weak July jobs report?
The report was weaker than expected, with payrolls falling by 23,000 against a forecast gain of 80,000, while unemployment fell slightly to 4.1 percent. One month of payroll data is a noisy signal and is frequently revised. It is more useful as one input among several, alongside GDP growth of 1.5 percent and the earnings results, than as a conclusion about where the economy is heading.
Do tariffs still matter for my portfolio?
They remain a source of uncertainty. The legal basis for U.S. tariffs has changed repeatedly over the past year, and the government is now refunding some earlier tariffs while imposing new ones under different statutes. Companies have adapted so far by adjusting supply chains and pricing, which muted the inflation effect, but the exposure is uneven across industries. This is a risk to be diversified against rather than predicted, which is the practical job of investment risk management.
What should a long-term investor actually do after a month like this?
Usually less than the headlines suggest. Look at three things. Has a strong run pushed your allocation away from its target? Has any single position grown into an outsized share of it? Is the money you expect to spend in the next few years sitting somewhere appropriate for that timeline? Those are plan questions, not market questions, and they can be answered without a view on what the Fed does next.
