Strong Profits Steady the Ship... But Will Inflation Rock the Boat?

Two themes shaped markets in August:inflation and the outlook for interest rates drove much of the movement in government bonds, while strong company earnings continued to support global equities. Below, we look at what happened and what it could mean for investors. 

What happened in financial markets in August?

Global markets experienced notable shifts over the month, driven by central bank and government policy announcements, changing energy sector dynamics, and the latest earning results from some of the world's largest companies.

• Government bonds faced significant pressures, driving their yields – the interest rates paid to investors – to near multi-year highs across major economies, as bond prices dropped. This movement was mainly led by US bonds and accelerated late in the month following stronger, anti-inflation policy statements from the Federal Reserve (“the Fed”).
• Currencies: The US dollar weakened slightly against a broad basket of currencies over the month, though it saw considerable volatility. Investors initially became concerned that strong US economic growth and government policy could keep inflation higher for longer, weighing on the dollar. However, towards the end of the month, the dollar recovered as the US central bank signalled that it remained focused on bringing inflation under control.
• Equities: Global stock markets continued to rise in August, adding to their gains so far this year. In the US, major indexes finished the month in positive territory, as healthy profits from large businesses helped investors look beyond the pressure from rising bond yields and higher energy prices linked to the ongoing US-Iran conflict.

The Fed’s latest view on the US economy

Every year, central bankers gather at Jackson Hole in the US to discuss the major issues facing the global economy. This year's meeting attracted particular attention, with Fed Chair Kevin Warsh using his speech on 28 August to give a clearer picture of how he sees the US economy and the path ahead for interest rates. His main message was that the US economy remains in good shape, but inflation continues to be a concern. 

Business investment is strong, company profits are healthy, consumers continue to spend, and unemployment remains low at around 4.1%. In his view, economic growth and the labour market are not currently main problems.

With the US showing signs of solid growth, Warsh is focused on inflation. Although US inflation has fallen from its peak, he believes it is still too high and that progress back to the Fed's 2% target has been too slow. He stressed that the Fedremains fully committed to achieving 2% inflation and that this target is not going to change.

Warsh also argued that current financial conditions are not “restrictive”. In other words, he does not believe interest rates are high enough to significantly slow the economy. He suggested that if inflation remains stubborn, there is more room for the Fed to raise interest rates. 

What is our macroeconomic outlook?

Our view is that a small number of further US interest rate increases are possible if inflation remains high. However, with the US economy and businesses still in relatively good health, we would not expect modestly higher interest rates to derail economic growth.

Bond markets have already considerably adjusted to this possibility. US government bond yields have risen as investors have lowered their expectations for interest rate cuts and accounted for the possibility that rates remain higher for longer.

What did we learn from the recent company earnings announcements?

The second-quarter earnings season was exceptionally strong for US companies, with earnings per share for larger US companies growing 56% over last year. This was a much stronger result than analysts expected, with 86% of the US’ largest companies beating earnings forecasts, up from 82% in the previous quarter. Management teams are also becoming more confident, with a record number of companies raising their forward guidance, meaning they expect business conditions and profits to improve further over the coming quarters. 

Importantly, strong earnings are no longer coming solely from a handful of large technology companies. A much wider range of businesses and industry groups are now reporting healthy growth, making the outlook more robust than if growth were concentrated in only a few companies.

What were the main drivers of these strong earnings?

The biggest driver of earnings growth remains the artificial intelligence (AI) investment boom. Companies continue to spend heavily on AI infrastructure, including data centres, computing power, and energy supply. This investment is creating significant revenues throughout the technology supply chain.

Outside the AI-related sectors, earnings growth remains healthy, although less spectacular. Energy companies benefited from higher oil prices, while banks enjoyed strong trading activity and active capital markets.

Overall, demand and corporate conditions appear healthy, despite some challenges from input costs and pricing pressures remaining elevated. Companies reported improving order books and stronger customer demand, which suggests earnings growth is supported by real business activity rather than just cost-cutting.

Why we remain positive on equities

Earnings growth remains exceptionally strong, even after adjusting for some large one-off gains reported by individual companies. Unlike historical norms, profits are significantly outpacing economic growth, largely due to the AI investment cycle. Heavy AI-related spending boosts technology suppliers' revenues while costs are spread over time, supporting profits. In our view, this tailwind should persist for several years, though at a more moderate rate.

The broad US stock market has gained nearly 20% over the last twelve months, but earnings have risen even faster, increasing around 56% (33% after accounting for one-off gains). Unlike the dot-com era of the late 1990s, profit growth is driving the market rather than higher valuations. As a result, the key question is whether companies can sustain strong earnings growth. We believe economic, business and policy conditions are likely to support continued growth over the next 12–18 months, underpinning an attractive outlook for equities.

Our outlook and implications for investors

August highlighted the contrasting forces shaping markets. Bond markets remained volatile as investors adjusted their expectations for inflation and interest rates, while strong company earnings continued to support stock markets.

Looking ahead, we expect US and global economic growth to continue, although US inflation is likely to remain somewhat above the Fed’s target. This could keep interest rates higher for longer, with the possibility of some further increases.

Despite this, we believe the broader backdrop remains supportive for stock markets. Economic growth is resilient, businesses continue to invest, and company profits remain strong. While periods of volatility are likely, we remain positive on equities over the next year.

Information correct as of 3rd September 2026.