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Market Commentary

Monthly Financial Markets Commentary — September 1, 2026

Stocks rose in the month of August, with the more speculative sectors of the market rising more than the "value" sector. It was the opposite story with bonds, however, as the relentless rise in longer-term interest rates continues, notwithstanding the best efforts of Scott Bessent to jawbone the market.

All measures of market valuation, such as price-earnings, price-to-sales, market-cap-to-GDP and the Schiller CAPE Ratio indicate that stocks are at historic highs. Retail investors have bought every dip in the market since 2010 and have been rewarded. Speculation in the market remains significant, with margin balances and stock ownership percentages being in record territory. Notwithstanding recent geopolitical concerns, such as the Iran War and increasing oil prices, investors remain "all in" and have noticably stepped up their buying. Retail investors are now supposedly the smart money, as institutions have been much less enthusiastic about equities. Historically this has not been a good setup for further advances in the market.

For 2026 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, has returned 13.06%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, has returned 13.56%. Finally, the Dow Jones Industrial Average, a price-weighted index, has returned 11.89%. For the month of August, the S&P 500 rose 2.73%, the Nasdaq 3.94%, and the Dow 1.48%. The AI trade now dominates the markets as well as the real economy, as reflected in such measures as capital investment and GDP. This makes any potential rout in the AI trade much more consequential than the bust in internet stocks in 2000, since the AI economic impact will be much more widespread.

The Morningstar U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, has returned -0.34% for the year. Historically the price of U.S. bonds rises on the outbreak of hostilities, as investors seek the safety of the world's currency. However, this has not been observed this time, indicating that investores are possibly more concerned about fundamental creditworthiness of sovereign debt. Credit spreads remain at very low levels, meaning that investors are demanding very little premium over so-called risk-free 10-year treasuries. Since the start of the year the script has flipped from expected rate cuts to expected rate increases, particularly with the hawkish stance of the new Fed Chairman, Kevin Warsh.

The sectors in the equity market that have performed the best so far in 2026 are Energy, Materials and Information Technology at 41.80%, 14.90% and 23.10%, respectively. Utilities, Communication Services, and Consumer Discretionary have fared the worst at -1.30%, -.20% and -.10%, respectively. The rise in energy stocks is not surprising given the run-up in oil, but supply constraints of refined products are probably more consequential. Breadth in the market is increasingly narrow with AI or AI-related stocks representing more than 50% of market value.

The comparison of current price/earnings ratios and dividend yields as of September 1, 2026 to those of the prior year is as follows.

* based on 12-month trailing data

The dividend yield, which is at historic lows, is a reliable metric of valuation, since it cannot be manipulated as earnings frequently are. Dividend yields continue to fall in 2026. While price/earnings ratios appear reasonable they are somewhat misleading, since in a significant cap-ex boom, as we are presently in, sales are inflated relative to depreciation (which of course reverses in later years). Free cash flow of the hyperscalers has collapsed.

Gold and crude oil futures most recently traded at $4,640.50 and $89.25, respectively, compared to $3,575.50 and $64.75 one year earlier. Gold has fallen significantly after a spectacular rise at the beginning of the year, although it has recovered some lately. Veteran observers of gold were not surprised by the sell-off, given it's historic run. In addition, it is likely that Middle East countries, who hold large reserves, were forced to sell some gold in the face of rapidly declining economies. Notwithstanding the developing view that gold is moving into the role of an alternate currency, it has reccently shown characteristics of a classic risk asset. The long-term fundamentals of gold remain very positive given the appetite for gold by central banks and the lack of fiscal discipline by nearly all developed nations.

While the price of a barrel of oil has not moved as significantly as some would have expected, given disruptions in supply, crack spreads have widened to historic levels. Barrels of oil are not consumed but rather refined products such as gasoline, diesel and jet fuel. The supply of these final products has been constrained due to the destruction of refining capacity and transportation issues. This has resulted in rising prices at this level and falling prices of inputs; hence the historic rise in crack spreads.