What Happened Last Week
- Fed Delivers a Hike: Last week, the Fed raised rates by 25 basis points and reaffirmed its commitment to fighting inflation.
- Strong Retail Data: August retail sales data showed considerable resilience among U.S. consumers.
- Tensions Rising: The European and Middle East conflicts continued to simmer last week, with new attacks further pressuring oil prices.
What We’re Watching This Week
- Fedspeak: Several members of the Fed will speak this week as the market continues to digest the hike and looks ahead to what’s next.
- Geopolitics: We continue to monitor fighting in the Middle East and the security situation in Eastern Europe as tensions rise.
- U.S. – China Summit: President Trump is set to meet Xi Jinping in Washington this week, with AI, critical minerals, and Iran expected to be on the agenda.
Investment Management Team’s Views
The Federal Reserve raised interest rates by 25 basis points last week, its first hike in more than three years, as policymakers continued to focus on elevated inflation. Markets ultimately absorbed the move relatively well, supported by a still-strong economic and corporate backdrop. We remain constructive on equities because higher interest rates have already been reflected to a meaningful degree through lower valuations, while earnings expectations have continued to move higher. In other words, returns are increasingly being driven by earnings growth rather than multiple expansion. As long as economic activity remains resilient and corporate profits continue to grow, we think equities can absorb some additional tightening. Strong consumer spending supports that view, although a more substantial hiking cycle could eventually challenge both valuations and earnings.
Geopolitical risks moved back toward the foreground late last week and over the weekend. Oil remains near $100 per barrel as conflict in the Middle East continues. At the same time, renewed attacks in the region provided another reminder that risks to energy infrastructure and supply have not disappeared. Tensions between Russia and Ukraine and its European allies have also intensified, with increased drone activity and attacks on targets inside Russia adding to concerns around the broader European security backdrop. Equity markets have remained relatively resilient to both conflicts so far, but higher energy prices remain the most important transmission channel for investors through their potential impact on inflation, long-term interest rates, and overall market sentiment.
The economic calendar is lighter this week, which could give some of these broader themes more room to influence markets. Investors will hear from several Federal Reserve officials following last week’s rate hike, while several consumer companies report earnings and provide another read on household demand. President Trump is also scheduled to meet with Chinese President Xi Jinping this week, keeping trade, critical minerals, artificial intelligence, and broader U.S.-China relations in focus. With earnings season largely behind us, our attention is increasingly shifting toward whether strong corporate fundamentals can continue to offset tighter financial conditions and a more uncertain geopolitical backdrop as we move deeper into the fall.