AI Passed. The Fed Raised the Bar.

GOOD MORNING, The AI boom passed another earnings test last week, but markets finished Friday trading the Fed instead. Chair Kevin Warsh used Jackson Hole to defend a fixed 2% inflation target and warn that the central bank still has work to do if price pressures do not cool fast enough, pushing short Treasury yields and the dollar higher while tech and small caps fell. Then Sunday brought a fresh U.S.-Iran exchange around the Strait of Hormuz. AI demand still looks strong; the next question is whether rates and oil let investors keep paying for it.

MARKETS | TLDR

Wall Street finished Friday softer: The S&P 500 fell 0.25%, the Nasdaq lost 0.52% and the Dow slipped 0.02% after Warsh's Jackson Hole remarks pushed investors toward a more hawkish September rate view.
The rate move was bigger than the stock move: The 2-year Treasury yield jumped 12.8 basis points to 4.36%, the 10-year rose to 4.728% and the dollar index gained 0.61%; the rate-sensitive Russell 2000 fell 1.4%.
Oil ended Friday lower — then Hormuz risk returned: Brent settled at $89.31 and WTI at $83.40, both slightly lower, before U.S. and Iranian forces exchanged strikes on Sunday near a shipping route that carried about a fifth of the world's oil before the conflict.

RATE RESET

The Fed Put Growth Back on a Rate Clock

Kevin Warsh did not promise a September hike at Jackson Hole. He did something more important for markets: he made clear that the Fed's 2% PCE inflation target is "firm" and that recent softer inflation readings have not convinced him the underlying trend has improved. Traders responded by lifting the implied probability of a September hike to 55.7% from 35.4% a day earlier, while the 2-year Treasury yield jumped nearly 13 basis points.

That repricing matters because the strongest parts of the market are also among the most sensitive to the discount rate. The Nasdaq fell 0.52% Friday and the Russell 2000 lost 1.4%, even after a week in which Nvidia had just reinforced the AI demand story. The signal is not that growth broke. It is that strong growth no longer guarantees easier policy — and higher short rates can compress valuations even when earnings remain intact.

The weekend added another variable. U.S. forces struck two Iranian launchers on Larak Island after a U.S. official said Iranian forces were preparing rockets carrying sea mines for the Strait of Hormuz; Iran then launched missiles toward U.S. forces in Jordan. Reuters reported that nearly all incoming missiles had been intercepted and there was no significant impact at that point. Markets had not yet had a full Monday session to price the development when this issue was published, but the mechanism is clear: renewed shipping risk can put oil and inflation back into the same rate debate Warsh just sharpened.

AI EARNINGS

AI Demand Passed. Expectations Got Harder.

Nvidia's fiscal second quarter gave the AI trade the demand evidence it wanted. Revenue reached $96.2 billion, up 106% from a year earlier, with Data Center revenue at $89.0 billion, up 117%. The company guided to roughly $108 billion of third-quarter revenue while assuming no Data Center compute revenue from China, and Vera Rubin is already ramping into full production across major cloud partners.

The harder part is what investors pay for that growth. Nvidia fell 4.6% Friday as rates repriced, showing how quickly a stronger discount-rate story can overpower even exceptional operating momentum. The company is also scaling an increasingly capital-intensive ecosystem: it announced partnerships with major asset managers and banks aimed at mobilizing more than $500 billion of third-party capital for AI infrastructure over time, subject to definitive agreements. Demand is not the only variable anymore; financing, supply and return on that capital matter too.

Marvell offered the contrast. Its Google custom-chip agreement could generate as much as $120 billion through fiscal 2033, and Marvell raised its fiscal 2027 and 2028 revenue forecasts. Investors still sold the stock sharply because management said the Google contribution would become much more material in fiscal 2029 rather than sooner. The broader signal: AI exposure can win attention, but the market is increasingly asking when that exposure converts into revenue, margin and cash flow.

HEADLINES

Salesforce raises forecasts and deepens its Anthropic partnership: Quarterly revenue rose 11% to $11.35 billion as Agentforce, Data 360 and Slack helped support a higher annual outlook — evidence that enterprise software can participate in AI monetization rather than only face AI disruption.
Meta agrees to an up-to-$18 billion teen-safety settlement: The agreement with nearly all U.S. states combines payments with nationwide restrictions for teenage users, turning platform-safety policy into a material operating and financial cost.
PayPal loses its takeover premium: Shares fell 12.7% Friday after Bloomberg reported that an Advent-Stripe consortium had abandoned its pursuit; the companies declined to comment, underscoring how quickly deal expectations can become part of a stock's valuation.
Gap's turnaround is working unevenly: Gap raised its annual profit outlook and named a new Old Navy CEO, while Gap-brand comparable sales rose 10% and Old Navy's fell 4% — a reminder that pricing and brand execution can still create winners inside a cautious consumer environment.
Consumer confidence weakens as inflation stays front and center: The University of Michigan's final August sentiment index fell to 51.7 from 55.2 in July, with respondents increasingly worried about inflation and gasoline prices — exactly the household pressure the Fed is trying to contain.

UPCOMING

JOLTS — September 1: July job openings and turnover will show whether labor demand is still firm enough to support the Fed's tougher inflation stance or is cooling fast enough to argue for patience.
ISM Manufacturing — September 1: The headline activity reading matters, but prices and supplier conditions may matter more after Warsh emphasized inflation and the weekend put Strait of Hormuz supply risk back in focus.
Broadcom earnings — September 2: Broadcom reports fiscal third-quarter results after the close, offering the next major read on custom AI silicon and networking demand after Nvidia's blockbuster quarter and Marvell's timing problem.
August payrolls — September 4: The Employment Situation is the week's biggest policy test. A resilient labor report would strengthen the case behind Friday's September-hike repricing; a materially softer one could reopen the debate.

DEEP INSIGTHS

Kevin Warsh's Jackson Hole Speech: In Our Time

Read the speech itself to understand the policy framework behind Friday's market move: a fixed 2% inflation objective, short-term rates as the Fed's predominant tool, less reliance on routine forward guidance and a view that broad financial conditions are not currently restrictive.

Nvidia Q2 FY2027 Results

The primary release is useful beyond the headline revenue beat. It shows where the AI economics actually sit — $89 billion of Data Center revenue, 75% gross margins, a $108 billion next-quarter guide with no China Data Center compute assumed, and a push to mobilize third-party capital for the next phase of infrastructure buildout.