Market Review 17th August 2026

Everything you need to know, Simplified!

Strong earnings results lift equity markets, but retail sales raise a cautious note

Summary

• The second quarter earnings season has been very strong, especially in the US, pushing equity markets to new highs

• Upside surprises have come from the technology sector, but also energy and increasingly industrials as economic growth continues to broaden out

• Inflation data from the US showed a continued moderation, which is helpful for equity markets, and led to lower expectations for an interest rate increase at the next Federal Reserve (Fed) meeting in September

• US retail sales in July fell the most in over a year, tempering enthusiasm in markets at the end of the week, and reigniting concerns about the health of the US consumer

• Emerging Market stocks outperformed as investors bought back into the Artificial Intelligence (AI) trade after some steep declines

• Yet another heatwave spread across the UK and Europe, with implications for agriculture production and food prices

• Markets now look ahead to UK inflation and US jobs data, which will provide further clues as to the near-term direction of interest rates.

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Market Review

Strong corporate earnings are supporting the market

The vast majority of second quarter earnings reports are now in, and the results have been strong. In the US about 85% of companies have beaten earnings estimates, and while the European figure is lower at about 63%, both metrics are above historical averages. In the US second quarter earnings growth is expected to be close to 25%, excluding some one-off equity investment gains for large cap tech, which is a very healthy number. Estimates have been rising all year, in contrast to most, when analysts usually start the year too optimistic, and earnings growth for 2026 is now expected to be 30%-35% in the US and 10%-15% in Europe. In the long-term equity prices tend to follow earnings, so this has been a positive week for markets, with US and Europe both reaching new highs.

So what has been driving this growth? In the US it has come mostly from the technology sector, as demand for AI compute and investments in AI infrastructure continue to be very strong. This has eased some fears about over-investment in data centres and compute, although this remains a live debate. The energy sector has also shown strong earnings growth, driven primarily by oil prices being materially higher than a year ago due to the Iran war. The industrials sector has also seen strong earnings growth and a recovery in orders. After several years of lower growth and destocking, industrial companies in the US are enjoying a cyclical upswing, as economic growth continues to broaden out. Corporate operating profit margins in the second quarter are now approaching 20%, much higher than previous years.

The situation is similar in Europe, with the energy sector seeing the strongest earnings growth year-on-year. Technology earnings have also increased, but less so than the US, and in Europe the large financials sector has seen higher earnings revisions too. The industrials sector has not performed as well as the US, as it still has strong links to automotive production, which continues to struggle in the face of Chinese imports. The sector with the highest negative revisions in Europe remains the consumer, as the high cost of living continues to dampen spending levels. In Asia results have been more mixed, but technology stocks rebounded on strong demand for AI, leading to Emerging Market indices outperforming over the week.

Are cracks appearing in consumer spending?

On the positive side, inflation figures out last week in the US were encouraging. The core Consumer Price Index (CPI) rose 2.5% year-on-year, in line with economist expectations and matching the slowest increase since March 2021. This pushed short-term government bond yields down on the day and expectations for an increase in interest rates fell. On a less positive note, at the end of the week retail sales numbers were clearly disappointing, falling 0.6% month-on-month compared to an estimate of +0.1%. Even stripping out the more volatile effects of automotive and energy sales it was a weak print, and the worst reading for over a year. Putting the number in context, retail sales in the US still grew 5% year-on-year, but the consumer remains a very important part of the economy, and continued weakness would be a concern for growth. However, if inflation remains more stable and the consumer is weak then there would likely be a lower chance of the Fed raising interest rates.

In Europe and the UK, the consumer has been struggling for a while with the cost-of-living crisis, having to cope with persistent inflation and high energy prices. Last week saw yet another record-breaking heatwave across the continent, with wildfires raging in drought like conditions in several countries. This has implications for agricultural production, with lower yields impacting supply, which could lead to higher food prices. It’s a risk that central banks will watch closely given the implications for inflation.

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The week ahead

UK CPI inflation

Economists expect stable inflation in July of 2.9% despite the spike higher in oil prices during the month due to renewed tensions in Iran. 

US initial jobless claims

Markets will be watching labour market data closely for any signs of weakness following a surprisingly soft nonfarm payroll report for July.

Federal Open Market Committee meeting minutes

Investors are likely to scrutinise the minutes of the last Fed meeting, given it was just the second for new Chairman Kevin Warsh, with the next taking place in mid-September.

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