CPI and What Comes Next
CPI came in line with expectations, so the reaction was small. The bigger question now is oil. The situation in Iran looks unlikely to end soon, and it keeps flaring up and cooling off. Oil matters to CPI because it feeds inflation, and CPI already runs above the Fed's 2% target. PPI comes tomorrow, and one more monthly inflation report lands before next month's FOMC meeting.
Whether the Fed hikes 25 or 50 basis points, or holds, is not a big deal in my view. If oil stays between $75 and $90, even with the conflict dragging on and inflation above 2%, the market can handle it as long as the Fed does not turn aggressive. CPI will likely sit near 3% for a while. That should not hurt stocks much unless a data print comes in as a real outlier.
The Real Driver: Earnings and AI
The main force in the market is earnings growth and the AI-driven backdrop. Demand read-throughs keep coming. Super Micro Computer guided Q1 revenue up 25%, with a midpoint of $15 billion against a street estimate of $12 billion. That is one anecdote, but pair it with Jensen Huang pooling $500 million more in liquidity for AI infrastructure, and the spending story stays intact. More spend means more data centers, which means more chips.
The debate over whether the AI economics work, whether hyperscalers are overspending, or whether some of this is misallocation is not an issue right now. It might become one next year. Nobody knows the timing. For now the market says it does not matter because demand read-throughs keep confirming the trade.
Technicals: Chips and the Melt-Up
The SOX (semiconductor index) is the laggard and the most volatile group. It was the best performer in the first six months, then fell 25% in five weeks, bottoming July 29th. It still trades below its 50-day simple moving average, but it looks healthy, up more than 3% on the day, helped by Super Micro and the Huang news.
Technically the SOX is grinding higher. The broader tape feels like a melt-up. Equal-weight S&P hit a new all-time high, then consolidated over the last four or five days. The risk, the pain trade, points to the upside. There was heavy pessimism a couple of weeks ago, concentrated in the tech and AI infrastructure trade. Sentiment surveys and higher short interest set up possible performance chasing and short covering. Breaking out to new highs puts the market in bullish price discovery, still searching for the fair multiple. With no resistance overhead, the path of least resistance feels higher.
That said, the back half of August into September is hurricane season, for weather and for stocks, so a volatility event could hit. The VIX below 15 is not signaling that; it is reflecting the S&P 500 melt-up of the past four or five days.
When Do Yields Become a Threat?
The melt-up is fueled by strong earnings momentum. The 1990s ran with a 10-year above 5-6% and without today's earnings strength, so the question is when higher yields turn into a market risk.
It depends on why yields rise. Is China or Japan selling? Is there a currency shock like 1998? Is the move about fiscal worries, or a more hawkish Fed? The velocity of the move matters, and so does where buyers step in. The 10-year is the benchmark. I would watch 5% on the 10-year. A new cycle high above 5% would suggest something fundamental has shifted, putting the bond market into price discovery above that level. We are not there. There are not enough bond vigilantes pushing yields around. Yields are higher and reflect fiscal, growth, and inflation expectations on the long end, but without heavy rate volatility the market stays comfortable with this higher-yield backdrop.
The long end sits near cycle highs on the 30-year, while the 10-year is better behaved. Volatility there would be the problem. Yields barely moved after the CPI print. A 10-year note auction hits at 1 p.m. Eastern, which will test appetite.
