The market’s real fight is rates vs. earnings—not the headlines.

The week began with enough potential catalysts to justify caution: the Iran conflict and Strait of Hormuz, oil, stress in the long end of the Treasury market, another major inflation release, Nvidia earnings, questions about the sustainability of AI capital spending, and Kevin Warsh’s first Jackson Hole address as Federal Reserve Chairman.

By Friday, the hierarchy was clearer. The market is still being driven primarily by the interaction between earnings growth and the cost of capital. Geopolitics matters when it changes oil, inflation, or rates. AI matters through both sides of the equation: extraordinary earnings growth and extraordinary capital requirements. Credit remains something to watch rather than something currently breaking. Volatility still suggests repositioning, not panic.

What mattered—and what did not

We entered the week treating Iran and Hormuz as potentially dominant because the transmission mechanism was straightforward: disrupted shipping raises crude, higher crude reinforces inflation, higher inflation raises Treasury yields, and higher yields compress equity multiples—particularly in QQQ. That chain did not disappear, but it weakened as crude declined and the market priced improvement at the margin.

The dominant issue migrated from oil-driven inflation risk to domestic inflation and monetary-policy risk. July PCE inflation was 3.7% year over year and core PCE was 3.3%. Equities absorbed the data because investors were waiting for Nvidia—and Nvidia then supplied the week’s largest positive equity impulse.

Nvidia’s results reinforced that demand for AI compute is not collapsing. The harder question is now the capital test: who earns an adequate return, who finances the infrastructure, at what rate, and whose balance sheet ultimately carries the risk?

AI demand appears real. AI economics are increasingly capital intensive. Those two things can coexist.

The rates story changed shape

Much of August’s concern centered on the long end of the Treasury curve. This week, pressure migrated toward the front and middle after Warsh’s remarks increased expectations that the Fed could tighten again. That is different from a disorderly rise in term premium driven by sovereign or fiscal concern.

Neither risk is favorable for equities, but conventional monetary tightening in a growing economy is easier to digest than dysfunction in the world’s benchmark risk-free asset. Long-duration Treasury stress remains one of the most important systemic variables we follow, but this week reduced the probability that it is developing into a self-reinforcing market accident.

The macro problem is not weak growth

The uncomfortable combination is resilient growth plus stubborn inflation. Consumer spending softened in July, while personal income remained supportive and second-quarter growth was revised to 1.5%. That makes the Fed’s job more difficult because the economy is not providing an obvious reason to tolerate persistent inflation.

It also explains why equities remain resilient. Higher rates accompanied by strong earnings and capital investment are fundamentally different from higher rates accompanied by collapsing demand and deteriorating profits. For now, the earnings side of that equation still carries considerable weight.

Credit refuses to confirm the bear case

Public credit is not signaling acute systemic stress. The ICE BofA high-yield option-adjusted spread remained near 2.7% during the week—far from the widening normally associated with an imminent credit event. Private credit is less reassuring, but there is an important distinction between identifiable deterioration and generalized contagion.

If high-yield spreads begin widening materially while equity volatility rises and private-credit stress accelerates, our interpretation changes quickly. That did not happen this week.

Volatility says caution, not fear

Large equity-fund outflows occurred while the VIX remained near the 14–15 area and capital continued to move into selected technology, smaller-company, and bond exposures. That does not look like capitulation. It looks like investors reducing concentrated exposure, reallocating, and hedging event risk while remaining broadly invested.

The market has repeatedly absorbed threatening information without producing the breadth deterioration, volatility expansion, and credit widening expected at the beginning of a genuine risk-off regime. That resilience deserves respect.

SPY and QQQ: our stance

SPY has the cleaner underlying structure because strong earnings extend beyond the largest AI names. QQQ has the more powerful earnings engine but the more obvious vulnerability to another meaningful increase in real or nominal yields.

That leaves us modestly bullish but tactically selective, rather than aggressively bullish. When volatility is suppressed, valuations are elevated, and both the Fed and bond market can produce abrupt repricing, there is little reason to chase mediocre setups.

A correct NO TRADE is preferable to manufacturing conviction in a noisy system.

We want the low-entropy setup—the moment when rates, breadth, volatility, positioning, and price action point in roughly the same direction. We did not have that consistently this week.

What matters next

The next test is the August employment report, followed by Broadcom earnings and the ISM manufacturing and services releases. The most informative result may not be the data itself but how markets react.

• If activity stays firm, yields rise, and equities hold, earnings are still dominating discount-rate pressure.
• If yields rise as breadth deteriorates and volatility and credit spreads expand, correction risk increases materially.
• If labor weakness lowers yields but challenges the earnings outlook, growth concerns can quickly replace the benefit of lower rates.

For the moment, earnings are still winning the argument. They are simply winning by a smaller margin than the index level alone would suggest.

Selected data sources

U.S. Bureau of Economic Analysis — July 2026 Personal Income and Outlays
Federal Reserve Bank of St. Louis — ICE BofA U.S. High Yield Index Option-Adjusted Spread

HER4 Market Interactions is general market commentary, not investment advice or a recommendation to buy or sell any security. Views are as of the issue date and may change as conditions evolve.