Softening Data, Strong AI Demand: A Market Searching For Direction

Executive Summary 

Last week, stock prices were up and bond prices were down (yields up). The MSCI Emerging Markets and MSCI EAFE indices outperformed the S&P 500. The best-performing sectors in the S&P 500 were energy, utilities, and consumer staples. Across U.S. Russell style and market-cap indices, mid-cap growth performed best, but the value factor led more broadly. 

As for fixed income, the 10-year Treasury yield was up to 4.69% over the week, and the 2s/10s Treasury yield spread steepened to +52 bps. High-yield bond spreads were nearly flat at 265 bps and still remain well below the 2025 high of 453 bps. 

Key Takeaways 

1. The labor market lost some momentum in July. Employers cut -23,000 jobs last month, while May and June payroll gains were revised lower by a combined -103,000. The negative revisions indicate hiring was weaker than initially reported. However, despite slower job growth, the unemployment rate remained relatively low at 4.1%, and private-sector employment grew +30,000. The report shows a job market that has started to soften, although conditions remain far from the weakness normally associated with a recession. Implication – The data weakens the argument that interest rates should remain elevated due to labor market conditions. 

2. July's inflation data eased some of the uncertainty created by the recent surge in oil prices. Headline consumer prices rose just +0.1% in July, while producer prices were unchanged, coming in below expectations for a modest increase. The energy component within CPI is still +14.5% higher than a year ago, but so far, the rise hasn’t translated into a similar increase across the broader inflation indexes. Implication – Inflation remains above the Fed's target, but July's data eased concerns that the energy shock is spreading more broadly. 

3. Expectations for another Fed rate hike have fallen as the economic data softened. Heading into last week's jobs report, markets assigned a greater than 50% probability to a September rate hike, driven by persistent inflation concerns and three dissents at the Fed’s July meeting in favor of higher rates. However, expectations for a September rate hike fell after the weak payroll report, moved lower again after Wednesday's CPI release, and declined further after Thursday's flat producer-price report. The shift reflects a different policy backdrop than investors faced several weeks ago: the labor market has softened while the latest inflation data has remained relatively contained, reducing the immediate case for additional tightening. Implication – With the Fed providing less guidance, incoming economic datapoints carry more weight. This week's data shifted the balance away from a September hike. 

4. Demand for the computing power tied to AI remains strong. Companies providing the physical infrastructure needed to run AI models continue to report rapid growth. CoreWeave buys advanced computer chips, installs them in data centers, and leases the computing capacity to customers, including some of the largest tech companies. Its quarterly revenue rose to a record $2.58 billion, while its backlog climbed to $104 billion. Other AI-infrastructure companies reported similarly strong growth this week, reinforcing that demand extends beyond CoreWeave. Implication – Questions remain about the magnitude of companies’ AI spending, but rapid growth in computing demand signals strong underlying demand both to train and run AI models. 

5. Small business confidence rose to its highest level in nearly a year. The NFIB Small Business Optimism Index climbed to 99.8 in July, its highest since August 2025 and above its long term average. Small businesses, which account for nearly half of private-sector employment, have faced several years of elevated inflation, higher borrowing costs, and difficulty finding workers. Those pressures remain, but July's survey showed improvement across most categories, including a sharp increase in hiring plans. Implication – Improving sentiment suggests some headwinds facing small businesses are beginning to ease.