AI Beat. Rates Still Won.

GOOD MORNING, Nvidia just delivered another quarter that made the AI demand story harder to argue with. Wall Street still sold it. The reason was not a sudden collapse in AI spending: Fed Chair Kevin Warsh used Jackson Hole to reinforce the 2% inflation target and say the central bank still has work to do unless underlying inflation moves clearly toward it. Short Treasury yields jumped, the dollar strengthened and rate-sensitive stocks weakened. Friday's lesson was simple: earnings can validate the AI boom, but rates still set the price investors are willing to pay for it.

MARKETS | TLDR

Wall Street ended Friday lower: The S&P 500 fell 0.25% to 7,711.76, the Nasdaq lost 0.52% to 26,402.42 and the Dow slipped 0.02% to 53,559.99 as Warsh's Jackson Hole speech revived expectations for a September rate hike.
The short end absorbed the Fed shock: The 2-year Treasury yield rose nearly 13 basis points to 4.36%, the 10-year climbed to 4.728% and the dollar index gained about 0.6% to 99.71 as traders raised the probability of a September hike to 55.7% from 35.4% a day earlier.
Oil eased despite unresolved Hormuz risk: Brent settled at $89.31 a barrel and WTI at $83.40, leaving both benchmarks lower for the week as traders weighed a partial recovery in Strait of Hormuz flows and rumors of a possible shipping agreement.

RATE RESET

Warsh Put the Discount Rate Back Into the AI Trade

Kevin Warsh's first Jackson Hole speech as Fed chair did not promise a September hike, but it gave markets a clear reaction function. The Fed's 2% PCE inflation objective is "firm" and "fixed," Warsh said, and policymakers need confidence that underlying inflation is moving toward that target clearly and fast enough. Otherwise, the central bank still has work to do. He also said current financial conditions do not appear particularly restrictive and pushed back against routine forward guidance.

Markets heard enough. The probability of a September hike rose to 55.7% from 35.4% on Thursday, the 2-year Treasury yield jumped almost 13 basis points and the Russell 2000 lost 1.4%, materially worse than the large-cap indexes. That is the transmission mechanism investors care about: higher expected short-term rates raise the hurdle rate for future cash flows, making richly valued growth companies and smaller borrowers more sensitive even when their operating results remain healthy.

The important caveat is that Warsh described a discipline, not a decision. August payrolls arrive September 4 and another inflation report is due before the Fed's September 15-16 meeting. Bank of America economist Aditya Bhave told Reuters that the burden is now on Warsh to follow through with a hike unless the next jobs and inflation readings are very soft. Friday repriced the policy path; the next week starts determining whether that repricing survives.

AI EXPECTATIONS

Nvidia Beat the Numbers. The Stock Failed the Test.

Nvidia reported $96.2 billion of second-quarter revenue, up 106% from a year earlier, while Data Center revenue reached $89.0 billion, up 117%. The company guided to roughly $108 billion of third-quarter revenue and did not assume any Data Center compute revenue from China in that outlook. Those are not numbers that suggest AI demand is fading. Yet Nvidia shares fell 4.6% Friday after rallying the previous session.

The disconnect matters because Nvidia is increasingly trading against expectations rather than absolute growth. When revenue is already doubling and the company is worth trillions of dollars, another strong quarter must compete with the valuation investors have already assigned to future demand, as well as the interest rate used to discount those future cash flows. Friday's selloff does not invalidate the AI buildout; it shows how little room remains for macro conditions to move against a crowded growth trade.

Marvell offered an even sharper version of the same lesson. Revenue hit a record $2.739 billion, up 37%, Data Center growth accelerated to 46% and management raised its fiscal 2027 and 2028 outlooks. Shares still dropped 10.3% as investors focused on how long it may take for the company's Google custom-AI-chip deal to produce meaningful incremental revenue. In this phase of the AI trade, "good" results are not enough when the market has already priced in exceptional ones.

HEADLINES

PayPal loses its takeover floor: Shares fell 12.7% after reports that Advent and Stripe abandoned their pursuit, shifting attention back from M&A optionality to whether PayPal's standalone turnaround can support the valuation.
Gap rallies on a turnaround with one big weak spot: Shares jumped nearly 13% after the retailer raised its annual profit forecast and installed Michael Francis as Old Navy CEO, highlighting that investors are willing to reward execution even while the company's largest brand still needs fixing.
Bitcoin joins the rate-sensitive selloff: Bitcoin fell more than 3% to about $77,400 as the dollar and short-term yields rose, another sign that Friday's Fed repricing reached beyond equities.
Hormuz flows improve, but not normally: Goldman Sachs estimated Gulf exports at 15 million to 16 million barrels a day — well above the March low but still 7 million to 8 million below pre-war levels — keeping geopolitical supply risk embedded in oil.
Market breadth was weaker than the indexes suggested: Decliners outnumbered advancers 1.77-to-1 on the NYSE and 2.19-to-1 on Nasdaq, while the S&P 500 and Nasdaq still finished the week higher; beneath the headline indexes, Friday's risk-off move was broader.

UPCOMING

JOLTS — September 1: July job openings will be the first major labor-market read after Warsh said the economy has remained resilient enough for the Fed to keep inflation at the center of the policy debate.
ISM Manufacturing — September 1: The market will look for both demand and pricing signals. Resilient activity combined with firm input costs would reinforce the view that policy may not yet be restrictive enough.
Broadcom earnings — September 2: Broadcom's report will test another layer of the AI infrastructure trade — custom accelerators and networking — after Nvidia and Marvell showed that investors are increasingly focused on the timing and quality of AI revenue, not just its growth rate.
August payrolls — September 4: The Employment Situation is the week's biggest rate catalyst. A resilient labor market would give the Fed more room to keep fighting inflation; a material slowdown would challenge Friday's hawkish repricing.

DEEP INSIGTHS

Kevin Warsh — "In Our Time"

Read the full Jackson Hole speech rather than just the rate-hike headlines. Warsh links AI-driven capital spending, elevated corporate profits, financial conditions and monetary policy, while making a broader case for reducing the Fed's reliance on forward guidance. It is the clearest source for understanding the framework markets were repricing Friday.

NVIDIA Q2 FY2027 Results

The release is useful beyond the headline revenue beat: Data Center grew 117%, Vera Rubin is already ramping into production and Nvidia's $108 billion Q3 outlook excludes China Data Center compute revenue. Those details help separate the underlying compute-demand story from Friday's valuation and rates-driven stock reaction.