A Fast Rebound Built on Real Earnings

The last few weeks have thrown a lot at investors. In late July, many investors were forced to sell, pushing stock prices down sharply. Then, almost overnight, things flipped. The Nasdaq 100 jumped nearly 10% in just a few days, and the S&P 500 rose 6%, breaking out of a range it had been stuck in for three months. Every major stock index hit new highs.

Several things came together to cause this turnaround. Tensions around Iran eased, which took pressure off interest rates and energy prices. At the same time, a weak jobs report made investors believe the Federal Reserve is more likely to cut rates than raise them. Wages have not grown much, but because workers are becoming more productive, companies are not seeing their labor costs rise much either.

Behind the scenes, fear in the market dropped sharply too. The VIX is at its lowest level since January. There are no signs of stress in credit markets. This suggests that funds had simply protected themselves during the scare rather than the underlying risks actually going away. Company earnings continue to be the real driver of this rally, with profit margins climbing from 13% to 17%, largely thanks to heavy spending on AI.

That said, not everything is rosy. Semiconductor stocks and South Korea’s stock market have lagged behind the broader rally. Big tech companies are still spending far more cash than they are bringing in from AI.

Currency markets sent their own message this week. For the first time since 1998, the U.S. and Japan jointly stepped in to support the Japanese yen. Meanwhile, gold had its third best week in 16 years, with silver and platinum also picking up momentum.