Stocks Drift to New Highs as Yields Menace

Stocks are drifting higher on strong earnings, but rising yields may become a risk.

The S&P 500 rose 0.4 percent between Friday, August 7, and Friday, August 14. The index closed at a new all-time high and briefly traded above 7,800 for the first time. Nine of the 11 major sectors advanced. The Russell 2000 small cap index also closed at a new all-time high.

No single event triggered the gains. Instead, they seemed to result from strong earnings and spreading optimism. Technical momentum was another potential factor following a breakout to new highs the previous week.

Technology got a boost from several companies. Their catalysts were slightly different, but all were consistent with strong demand for AI investment.

• SanDisk (SNDK): The memory-chip maker said revenue will grow in the mid-to-high teens through fiscal 2030. That suggested the products are moving from erratic boom-and-bust cycles to stronger and steadier long-term demand. The guidance was similar to forecasts from rival Micron Technology (MU) on June 24.

• Super Micro Computer (SMCI): The maker of AI servers beat earnings estimates and forecast strong revenue for the current fiscal year. Rivals like Dell Technologies (DELL) and Hewlett Packard Enterprise (HPE) gained from the view. Data-storage companies Seagate Technology (STX) and Western Digital (WDC) also jumped.
• Nebius (NBIS): The neocloud operator beat estimates as "demand for AI capacity continues to grow exponentially." (According to CEO Arkady Volozh.)
• CoreWeave (CRWV): The neocloud operator jumped after reporting strong profit, revenue and guidance.

"Earnings have been phenomenal," strategist Ed Yardeni told Bloomberg Television. He raised his price target on the S&P 500 from 8,250 to 8,400. "We've never seen consensus earnings expectations rise so quickly," according to his report. Separately, Evercore's Julian Emanuel said 9,000 may be in sight by the end of next year. Like Yardeni, he cited earnings growth.

Nvidia Makes a Move

Nvidia (NVDA) announced a plan with financials including Goldman Sachs (GS) to mobilize $500 billion of AI investments. NVDA, which reports earnings next Wednesday, August 26, ended the week at its highest level since early June. Will it lead the technology sector back to new record territory?

Reddit (RDDT) also jumped on news it will join the S&P 500 tomorrow. Workday (WDAY) had its biggest daily gain in a decade after Reuters reported Silver Lake Partners was considering a takeover.

That helped make software one of the top-performing industries last week. Gold miners rose on hopes the Fed won't raise interest rates next month. Energy was the top-performing sector with its best week in almost four years. The Hormuz crisis has been especially positive for refiners like Marathon Petroleum (MPC).

Airlines, retailers and homebuilders lagged. Speaking of homebuilders, Berkshire Hathaway (BRK.B) reported late Friday a bigger stake in Lennar (LEN) and a new position in D.R. Horton (DHI).

All told, 16 members of the S&P 500 had double-digit gains last week. Only four dropped at least 10 percent (including rounding).

Bond Yields

Last week saw diverging news about borrowing costs. On one hand, the yield on the 10- and 30-year Treasuries remained near multiyear highs. However, some news could make investors expect a decline.

First, July's consumer price index (CPI) matched estimates and producer prices rose less than expected. That may suggest inflation isn't running out of control. Second, retail sales missed estimates while initial jobless claims were above estimates. Consumer sentiment also surprised to the downside. Those numbers could mean the economy isn't strong enough to merit higher interest rates.

CME's FedWatch tool adjusted downward in response, with odds of a rate hike on September 16 sliding from 44 percent on August 7 to 33 percent on August 14.

Demand for new Treasury notes was also slightly above average in two of the three auctions last week. While yields were historically high, that could suggest significant further increases are less likely.

Yields may remain an important subject for investors because bonds can compete with stocks for investor capital. Higher borrowing costs can also impact earnings -- especially when companies are borrowing to pay for AI datacenters.

Charting the Market

While yields are a potential risk for stocks, the S&P 500's chart may show few apparent hazards.

Its rally earlier this month drove the 9-day rate of change near 6 percent. Such sharp increases have historically been associated with continued upside.

Second, the 8-day exponential moving average (EMA) is expanding above the 21-day EMA. That may look similar to price action in early April as a rally began.

Third, the moving average convergence/divergence (MACD) oscillator is rising.

Next, Cboe's volatility index (VIX) ended last week at its lowest level since December 30.

The Week Ahead

This week's agenda brings housing data and retail earnings.

NAHB's homebuilder sentiment index is due today.

Housing starts and building permits are due tomorrow. Home Depot (HD), Baidu (BIDU) and Keysight Technologies (KEYS) announce quarterly results.

Target (TGT), Lowe's (LOW) and Analog Devices (ADI) report on Wednesday, followed by crude-oil inventories. Minutes from the last Fed meeting are due at 2 p.m. ET.

Thursday's items include jobless claims and results from Walmart (WMT) and Alibaba (BABA).

Nothing important is scheduled for Friday morning.