11.08.202610:22 Forex Analysis & Reviews: Market calm belies underlying risks

While the S&P 500 treaded water following a week of strong corporate earnings, the market itself was already flashing a signal that traders prefer to ignore: corporate profits are accelerating so rapidly that historically this has almost always foreshadowed a jump in Treasury yields.

S&P 500 Earnings Growth vs. Treasury Yields

Investors are once again balancing between the uncertain path of Fed rates and geopolitics, with the equity market remaining largely static, showing only a slight negative bias due to higher yields and oil. Six of 11 sectors closed in positive territory, with energy leading on the back of higher oil prices and stalled plans to reopen the Strait of Hormuz. JPMorgan Chase raised its year-end 2026 S&P 500 target, citing a strong earnings season and earlier-than-expected evidence of returns from AI investments. The futures market is pricing in a move of just +/- 0.6% following inflation data – a step that looks suspiciously modest.

However, rising earnings themselves are a source of future inflation. Cyclical stocks, which are positively correlated with rising prices, dominate the market, while Societe Generale's inflation-proxy index, which had moved in lockstep with the MSCI World for years, has surged ahead by 71% over the past year. This is a warning to central bankers that the market is writing for itself.

MSCI vs. Societe Generale Inflation Proxy Index

That said, it is still difficult to argue that monetary tightening is already constraining the corporate sector. Smart money on Wall Street has no doubt: hedge funds have been accumulating global equities for the second consecutive week, with gross trading activity rising at its fastest pace in seven weeks – long purchases exceeded short sales by a ratio of 1.4 to 1, according to Goldman Sachs. This marks a sharp reversal from July, when funds were cutting risk amid the AI sector sell-off and ended the month down 0.8%. The materials sector was the most bought, driven by a wave of short covering not seen in nearly two years.

Semiconductors, a barometer of global risk appetite, have recouped more than 18% from their July low, though the Philadelphia Semiconductor Index still needs to rise another 18% to return to its summer peak. Nvidia gained nearly 12% on the week, adding a record $562 billion in market capitalization – the wind is still blowing in the sector's sails.

The market is behaving as if it already knows the answer to the Fed rate question. But what if investors are once again mistaking a tailwind for an approaching storm?

Technically, on the daily S&P 500 chart, a drop below the pivot level of 7,730 would increase the risks of activating a 1-2-3 reversal pattern and would be a reason to sell. Conversely, if bulls manage to repel the attack and hold the key level, there would be grounds to add to previously established long positions.