US Equities: Weekly Review (Sep 7 - 11)

The S&P 500 fell 0.8% for the week. The Dow lost 1.6%, the Nasdaq declined 0.7%, and the Russell 2000 dropped more than 2%. Equities sold off for four straight sessions before recovering on Friday. The S&P gained 0.86% and the Nasdaq rose 0.96%, but the move was not a clean inflation rally. It followed the first meaningful pullback in oil after eight consecutive up days, with WTI falling 2.4% back toward 100 dollars a barrel.

The bigger change happened in rates.

A stronger jobs report, a firm headline PPI reading, and a hotter-than-expected core CPI print pushed the market away from debating whether the Fed would hike in September. By the end of the week, the question had become how many hikes the Fed might deliver before year-end.

September hike odds moved to roughly 86% after CPI. Further out the curve, rate markets shifted toward a path of two or three hikes by December. For equities, that distinction matters more than a single 25 basis point move. One hike is an event. A sequence of hikes changes the discount rate investors apply to long-duration assets and forces a broader reset in valuation.

Treasury yields reflected the same shift. The two-year yield reached its highest level since July 2024, while the ten-year briefly moved above 4.95%. Treasury auctions were well received, which suggests this was not a buyers’ strike. Investors were still willing to own Treasuries. They simply demanded a higher yield to do so.

That is why it is too simple to frame the week’s move as a fiscal story. Fiscal concerns matter for long-term rates, but the more important move happened at the front end of the curve. The curve flattened as the market repriced the likely path of Fed policy.

Diesel Is Moving Into Earnings

Oil matters, but diesel matters more.

US retail diesel prices crossed six dollars a gallon for the first time on record. New York Harbor ultra-low sulfur diesel reached a record high. In August PPI, diesel rose 24% in one month and became one of the largest contributors to producer inflation.

Diesel reaches far beyond the energy sector. It powers freight, rail, shipping, agricultural equipment, construction equipment, and many parts of the industrial economy. Refining capacity is already tight, and disruptions in the Middle East and the Russia-Ukraine war have added pressure to refining and logistics. Crude can often be sourced from another producer. Refining capacity cannot be replaced quickly.

The next step is where the equity market comes in. These costs are moving down the supply chain, but companies are struggling to pass them all the way through to consumers. Producer prices rose, while margins at fuel retailers narrowed. Wholesale costs rose faster than retail prices, leaving the retailer to absorb the gap.

CASY captured that problem. The stock did not fall because its business suddenly stopped growing. Investors were pricing in pressure on the fuel-profit part of the business. The same risk applies to freight, retail, restaurants, industrials, and consumer services.

The closer a business is to the raw-material end of the chain, the easier it is to pass through price increases. The closer it is to the consumer, the harder that becomes. The difference does not disappear. It shows up in corporate margins.

CPI Does Not Capture the Whole Problem

Core CPI rose 0.29% in August, above expectations. But energy was not the main driver. Shelter picked up, lodging rebounded after two weak months, and airfares, used cars, and wireless services added pressure. Those are mostly service-sector moves with their own pricing dynamics.

That leaves two inflation stories running in parallel.

Services inflation is still firm enough to keep core CPI uncomfortable. At the same time, energy and freight costs are putting pressure on goods-producing and consumer-facing businesses, even where those costs have not yet appeared fully in retail prices.

Core CPI measures the portion of cost pressure that has already been passed on to consumers. It does not fully capture the pressure still sitting on corporate income statements. A benign core CPI reading would not mean that the cost shock has gone away. It could mean that companies are still absorbing it.

That is why the market should not focus on one CPI headline. Diesel, shipping, and food costs usually move through the economy with a lag. The harvest and heating seasons will test how much of the recent cost increase reaches consumers. FIZZ already offered an early example this week, citing higher packaging and ingredient costs in its earnings results.

The Fed Is Watching Expectations

Rate hikes cannot lower the price of diesel. They cannot restart a refinery or reopen a shipping lane through the Strait of Hormuz. What monetary policy can affect is financial conditions and inflation expectations.

That is why the Michigan survey mattered so much this week. Consumer sentiment fell to 47.8, while one-year inflation expectations jumped from 4.0% to 4.6%. Longer-term expectations also edged higher. Falling confidence and rising inflation expectations are a difficult combination for the Fed.

Until recently, the Fed had treated elevated inflation largely as the result of supply-side disruptions, including energy. That framing implied the central bank could afford to wait, since an energy shock can fade without rate hikes.

The calculation changes once households and businesses start treating higher prices as permanent. Workers push for higher wages. Companies set higher prices in anticipation of future costs. Investors demand more compensation for inflation risk. At that point, the problem extends beyond oil.

This is why the market is pricing more hikes even though hikes cannot make diesel cheaper.

The problem is that higher rates work by weakening demand, and demand is already under pressure. Companies are absorbing energy costs. Lower-income consumers are more exposed to fuel, food, and borrowing costs. Housing is already feeling the effects of higher mortgage rates.

The Fed is not choosing between a painless option and a painful one. It is choosing between allowing inflation expectations to rise further or tightening into an economy where margins and consumers are already weakening.

Friday Was a Relief Rally, Not a Resolution

Friday’s rally was tied to the Strait of Hormuz.

Iran, Iraq, and Gulf Cooperation Council states are expected to meet in Oman to discuss arrangements for shipping through the strait. Any progress on safe corridors, mine clearance, or temporary traffic management could ease oil, diesel, freight, inflation expectations, and rate pricing at the same time.

WTI’s 2.4% decline on Friday, which ended an eight-day rally, showed how quickly that chain can run in reverse.

Still, the meeting should be viewed as an opening rather than a settlement. A diplomatic discussion does not immediately resolve shipping, military, or political risks. The Red Sea and Hormuz remain unstable, and Houthi advances in Yemen have added another source of risk for regional trade.

One market signal is worth watching closely. Oil rose sharply this week, but energy and oil-service equities did not sustain the same move. That suggests investors are increasingly focused on demand destruction and pressure on refining margins rather than simply assuming higher oil is bullish for every energy stock.

At lower levels, rising oil improves energy-sector profits. At higher levels, oil starts damaging demand, consumer spending, freight activity, and the companies that sell refined products.

AI Is Strong, But Cash Flow Matters Now

The AI fundamentals did not break this week.

ORCL reported strong cloud infrastructure growth, large new AI contracts, and further data center capacity coming online. MSFT is reportedly planning a major expansion in data center capacity, while OpenAI paused some Pro subscriptions because demand for its newest model exceeded available capacity. The constraints remain compute, power, equipment, and construction timelines, not customer demand.

But the market’s response to ORCL showed that the AI conversation is changing.

Investors used to ask whether AI demand was real. They now ask when that demand turns into free cash flow, whether capital spending can keep rising without damaging margins, and whether data-center construction costs and timelines are under control.

That does not mean the AI trade is over. It means the trade is maturing. Revenue growth, bookings, and capacity additions still matter, but cash flow, return on capital, and financing capacity now matter just as much.

Hardware, networking, and data-center infrastructure remain direct beneficiaries of the buildout. At the same time, DeepSeek’s new model, which reduces the HBM and SSD resources required for each inference workload, creates a question for the memory trade: can growth in AI usage outrun the decline in hardware required per query?

That question will not erase memory demand overnight. It will, however, change how investors value companies such as MU and SNDK. Memory demand forecasts now need to account for both usage growth and gains in model efficiency.

Three Questions for Next Week

The Fed meeting is not just about whether the central bank hikes.

• First, watch the rate projections and the policy language. A September hike is already heavily priced. The real information lies in whether the Fed validates a path of additional hikes later in the year. If officials move their year-end rate forecasts higher, the market will need to apply lower valuation multiples to expensive, long-duration assets.
• Second, watch how the Fed describes inflation. If policymakers continue to frame the issue mainly as a temporary energy shock, investors can still expect a pause after September. If the focus shifts toward services inflation and inflation expectations, the market will assume that policy needs to remain restrictive for longer.
• Third, watch Oman. The Fed can tighten financial conditions, but it cannot create refining capacity or reopen the Strait of Hormuz. A credible improvement in shipping access could change the direction of oil and risk assets faster than a single Fed decision.

The central tension remains unresolved. AI investment and revenue growth are still strong, while energy is pushing rates higher and squeezing corporate margins through diesel and freight costs. One side supports earnings expectations. The other weakens valuations and profitability.

Third-quarter earnings season will be the first broader test. The market should look beyond revenue and EPS. Watch for what management teams say about freight, fuel, raw materials, pricing power, margins, hiring, and capital spending. That will determine whether this is a short-lived energy shock or the beginning of a larger growth problem.

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