S&P 500 Stalls as Sticky PCE Inflation Clouds Nvidia Earnings Day

A flat close that said more than it seemed

The S&P 500 barely moved on Wednesday, Aug. 26. It slipped 0.02% to close at 7,675.70 after the July personal consumption expenditures report showed inflation still running hot.21 The Nasdaq Composite fell 0.08% to 26,130.20, and the Dow Jones Industrial Average gave up 113.52 points, or 0.21%, to finish at 53,463.88.21 On paper it was a quiet session. In practice, two forces were pulling against each other: inflation data that wouldn't cool, and the market's dependence on one company, Nvidia, which reported after the bell.

With the September consumer price index due this week, that late-August session is worth a second look. Most of what has happened in inflation, consumer spending and stocks since then traces back to the same tensions.

What the July PCE report actually showed

The PCE price index is the Federal Reserve's preferred inflation gauge. In July it rose slightly more than forecast, while the core measure, which strips out food and energy, landed on expectations.21 Core PCE climbed 0.2% from June and 3.3% from a year earlier, both in line with Dow Jones estimates.21 Calendar data put the July headline figure at 3.7% against a 3.6% consensus.3

The miss was small, but it reached a market that was already nervous. Treasury yields had hit multiyear highs the week before, and the 30-year bond rate touched levels not seen in nearly two decades.21 Traders feared higher oil prices would push inflation up again.21 Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said the mild upside surprise and the economy's strength were not what investors or the Fed wanted to see, but were not enough to change the outlook for the September Fed meeting.21 The striking point is that the debate was about whether the Fed would raise rates, not cut them. The report did little to change expectations of a hike the following month.21

The spending side of the July report was softer. Real consumer spending rose 2.14% from a year earlier, down from 2.63% the month before. Real goods spending slowed sharply to 1.26%, while services held up better at 2.53%.9 Gasoline and other energy goods were up 25.09% from a year earlier and added nearly half a percentage point to headline PCE inflation.9 Taken together, the July numbers showed energy keeping prices high while households cut back on goods.

Nvidia as the market's second big test

The other half of the story was Nvidia. Wall Street expected second-quarter earnings of $2.09 per share on $92.28 billion in revenue, and the company's market value of more than $5 trillion made it the largest member of the S&P 500.21 Other coverage put the revenue estimate near $92.2 billion, almost double the year-earlier quarter.22

The stock itself was drifting before the report. It fell more than 1% on the day, was headed for its eighth loss in nine sessions, and was up less than 13% for the year.21 Investors were bullish but braced. UBS's Ulrike Hoffmann-Burchardi warned the results could add volatility, since investors wanted a strong beat and guidance showing lasting demand for AI chips.21 Siebert Financial's Mark Malek put it more bluntly: good news was expected, but by everyone.22

The company's financial summary now lists second-quarter fiscal 2027 revenue of $96.22 billion, well above the consensus going into the print.29 Nvidia is up 21.64% so far this year, compared with 14.05% for the S&P 500.29

This is the key point. Even with sticky inflation and yields at multiyear highs, the market's direction has depended heavily on AI earnings. Goldman Sachs analysts expect AI infrastructure stocks to drive more than half of S&P 500 earnings growth in the third quarter. They think Nvidia and Micron alone could account for about a third of it.27 When monetary policy is a headwind, that kind of concentration props the market up, and it also leaves the market more exposed if those few companies stumble.

The CPI picture since then

The August CPI report, released Sept. 11, matched the late-August tone. Headline CPI rose 0.4% for the month after 0.1% in July, and the annual rate held at 3.4%.11 Gasoline jumped 3.9% and accounted for more than a third of the monthly increase. Energy prices overall were up 16.3% from a year earlier.11 Core CPI rose 0.3% for the month, but its annual rate eased to 2.4% from 2.5%.11 That was the lowest core reading since March 2021, although the monthly gain beat the 0.2% forecast.13

Coverage of that report split. Data summaries stressed that it broadly matched forecasts.13 Other reporting called inflation stubbornly high and said the report strengthened the case for a Fed rate hike. That reporting pointed to supercore inflation, which covers services excluding energy and housing, accelerating to 0.5% in August.15 Both are fair readings of the same numbers. Headline CPI is an energy story. The services detail is what worries people who think inflation is spreading.

Core CPI and core PCE also tell different stories. Core CPI was at 2.4%, while core PCE in late August was 3.3%.1121 That gap is part of why investors read each new inflation release so differently.

The revision that changed the story

The August PCE report, released Sept. 30, put a revision on the record, which helps explain some of that split. The Bureau of Economic Analysis changed how it measures prices for portfolio management, legal services and computer software.5 Those changes cut July's headline PCE inflation from 3.7% to 3.4% and core from 3.3% to 3%.5 In other words, the "sticky" July reading that kept stocks flat on Aug. 26 was later revised to look much milder.

August headline PCE was 3.4% against a 3.7% forecast, and core was 3% against 3.3% expected.10 Stephen Brown of Capital Economics estimated the method changes took 0.3 percentage point off core inflation. The revisions left three-month annualized core inflation at exactly 2%.10 Odds of an October rate hike dropped from about 51% to 35%, according to CME FedWatch.1

Not everyone was persuaded. One analysis argued the report was a relief, not an all-clear.4 CNN still called inflation stubborn and noted prices rose 0.3% for the month as war-driven energy costs fed through.5 Fed governor Michael Barr said he had seen only two months of data consistent with 2% core PCE in the past 20 months.10 Fisher Investments made the opposite case: inflation is mainly an oil-and-gas story. PCE excluding energy rose 2.9%, consistent with its trend since early 2024.2

The second reading looks more persuasive. Services inflation has held steady at 3.4%, and the jump in goods inflation came from gasoline and other energy goods rising 27.9%.2 Even so, one breadth analysis found that roughly 62% of spending-weighted core PCE components are rising faster than 3%.6 That is a reminder that averages can hide how widely prices are rising.

Consumers are spending through it, but at a cost

The consumer has held up better than many forecasts assumed. Inflation-adjusted spending rose 0.6% in August, the biggest monthly gain since March 2025.1 Spending before adjusting for inflation rose 0.9%.8

The financing behind that spending looks shakier. Inflation-adjusted disposable income was flat in August, and Americans have been drawing down savings.5 The saving rate was 4.1%.7 JPMorgan research suggests wealthier households cashing in stock gains may be driving some of the spending, while other consumers may be borrowing more.8 That ties consumer demand to the stock market itself, and the stock market is tied to AI earnings, so a weak quarter there could hit both stock prices and household spending.

What to watch this week

The September CPI report comes out this week. Most calendars list it for Wednesday, Oct. 14.19 Forecasts mostly agree on headline CPI: FactSet's consensus is a 0.5% monthly gain and 3.6% annual inflation, with core rising 0.2% and holding at 2.4%.18 Another preview expects 0.6% for the month and core at 2.5% for the year.20 The Cleveland Fed's nowcast puts headline at 0.53% for the month and 3.60% for the year.12 Brent crude above $106 a barrel will keep energy pushing up the headline number.24

Tim Holland, chief investment officer at Orion, expects a hotter-than-expected print to be "not enough to derail" a Fed widely expected to hold rates steady.25 Bank of America economists warn that a hot reading could bring back talk of rate hikes.18 The likely outcome is that headline inflation heats up while core stays calm, and markets will mostly decide that the core number is the one that matters.

Aug. 26 showed how fragile that is. When core inflation behaved but the headline ran slightly hot, the market went nowhere until Nvidia reported. Analysts expect third-quarter S&P 500 earnings growth of nearly 30%.25 For now the market is betting that strong AI profits can outweigh energy-driven inflation, and each new inflation report tests that bet.