Through the (Increasingly Clear) Looking Glass

As always, we defer to our Northern Trust Economics team for the firm’s views on Federal Reserve (Fed) policy, and we will cover the market implications. One of our core messages on these pages has been that despite rampant focus on AI, geopolitics and election considerations, the bond market remains in charge of capital market outcomes. In an increasingly leveraged world where consumer spending and business capital expenditures are conducted through borrowings, interest-rate trends remain critical. The Fed has a meaningful influence on interest rates, and with Chair Warsh’s swearing in 100 days ago, markets have awaited more definitive insights into the change management associated with a Warsh-led Fed.

While most new leadership positions build in a (real or perceived) communication grace period, capital markets have a tendency for shorter listening tour allowances. Further, markets have grown accustomed to a garrulous Fed; since 2011 under Chair Ben Bernanke, the Fed introduced four press conferences and included a detailed Summary of Economic Projections that include participant views on economic growth, employment, inflation and the appropriate policy rate.¹ That cadence continued until January 2019, when then-Chair Jerome Powell began a press conference following each of the eight scheduled Fed Open Market Committee (FOMC) meetings each year.² Those press conferences coupled with global central bank tendencies from the Bank of Japan, the Bank of England and the European Central Bank coalesced around more explicit “forward guidance” or previews of what markets should expect from future policy decisions.

Early in his first 100 days, Chair Warsh has eschewed forward guidance, emphasizing that departure during his first post-FOMC meeting commentary. Following his second meeting in late July, Warsh cited progress in the capital market and Fed relationship, noting that “market participants are learning to play the ball, not the referee, and market prices will continue to respond in the direction and magnitude they see fit. This is, in my view, a change for the better, and we're just getting started.”³ Capital markets did not like the messaging, sending bond yields to their highest levels in 18 months in the days that followed.  

In his opening lines of today’s speech, Chair Warsh previewed his comments and jokingly underscored “You can call it an outline . . . you can call it a trail map . . . just don't call it forward guidance.”⁴ Warsh went on to cite an example of where forward guidance potentially restrained a policy response, and also noted “when policymakers make quasi-commitments on interest rates through the cycle, we inhibit our own freedom to make the right calls when it's time to decide.”⁵

However, Chair Warsh did offer capital markets insights into a few key variables that we would not characterize as forward guidance, but that help reaffirm principles and variables that drive Warsh’s views. First, Warsh reaffirmed the Fed’s 2% inflation target, and said the 65 straight months of “sustained, elevated inflation” is a Fed responsibility.⁶ Second, as we have discussed in these pages, the Fed has oscillated its emphasis within its three mandates (price stability or inflation, a healthy labor market and the oft-forgotten objective of sustaining moderate long-term interest rates). At this conference last year, then-Chair Powell expressed concerns over challenged labor markets, causing markets to interpret a weakening labor market as the Fed’s chief concern.⁷ In today’s comments, Warsh handed the baton firmly back to inflation, citing commodity price increases along with trend data within consumer goods and services.

In a helpful update from our Chief Economist Carl Tannenbaum, his team’s read is that the speech tilted more hawkish and was more detailed than Fed watchers anticipated. Carl notes that the Fed will digest one more employment situation report and another inflation read before convening in mid-September. Markets currently assign a 60% chance of a rate increase at that meeting, twice the level expected two weeks ago. 

NVIDIA’s earnings report offered several important focal points, and while we do not provide individual security recommendations on these pages, assessing implications to our working hypothesis on this sector remains paramount. Our overarching framework within AI is that supply and demand balances will determine the forward path; history is littered with novel technologies where demand curve extrapolation proves overly exuberant. Further, we are at a stage now where simply investing in the AI ecosystem writ large and not taking a more thoughtful approach could prove misguided. Finally, the interconnectivity within the AI ecosystem, including concerns about circular financing, on- and off-balance sheet financing arrangements and the risk that AI capital expenditures reflect excessive optimism envelop the current landscape.

With those caveats in mind, NVIDIA’s earnings were strong, and while their equity price gave back some of Thursday’s gains, investors were enthusiastic about company guidance. Revenue grew 18% sequentially and 106% from a year ago, and profit margins stood at 75%.⁹ Revenue specific to data center buildout totaled $89 billion, a 117% increase from last year.¹⁰

What caught investors by surprise was what NVIDIA guided to for their fiscal year 2028: 70% revenue growth. While most of that guidance will fall within calendar year 2027, it does speak to better visibility than what markets anticipated. Supply has been a major constraint for most of the AI manufacturing landscape, and NVIDIA noted that while supply remains an important consideration, they are comfortable with demand trends to provide their fiscal targets.¹¹ Further, in assessing commentary from their CFO, the company took active steps during their conference call to address financing considerations across partnerships. While one earnings report does not make a trend, these results suggest that the supply/demand balance that markets scrutinize remains in favor of AI as a technology still in diffusion mode.

For S&P 500 companies with quarterly earnings periods between mid-May and August, we are 97% of the way through with earnings season. Sales growth has totaled 15% and earnings growth a whopping 52%, with both metrics led by energy, technology and communications companies. Health care remains the only sector with negative earnings growth, reflecting the influence of two large companies.¹²

While we are encouraged that equity performance has not been narrowly driven by technology companies, some of the outlier surprises and growth stories have been more limited to companies tied to AI’s continued buildout. Within the S&P 500 index, the 11 major sectors comprising the index remain somewhat top heavy, with four subsectors outperforming the broad index (energy, information technology, materials and industrials) and the remaining seven underperforming.¹³

European sales and earnings growth have underperformed their domestic counterparts, and while their major sectors do not completely align with the S&P 500’s, the index is also modestly top-heavy with energy, basic resources and technology also dominating total returns.¹⁴ Asian indices, as we have covered in prior sessions, tend to be lumpier by sector and factor exposures so comparisons are less clean.

One trend that has our attention is a push higher in earnings growth rate expectations for both the U.S. and broad European indices. 2027 sales and earnings growth for the U.S. sits at 8.4% and 17.2%, respectively. European earnings growth, while more subdued, is still double digits. NVIDIA’s earnings provide some basis for belief in the sales growth cycle, but consumer demand trends in addition to business capital expenditures will remain a focal point as we shift out of earnings season.

¹ Board of Governors of the Federal Reserve System. “What is the Summary of Economic Projections?” Federal Open Market Committee FAQs. https://www.federalreserve.gov/faqs/summary-economic-projections-sep.htm. Accessed 28 August 2026.

² Board of Governors of the Federal Reserve System. “Chairman Powell’s Press Conference, January 30, 2019.” Federal Open Market Committee Meeting Calendars and Information. https://www.federalreserve.gov/monetarypolicy/fomcpresconf20190130.htm. Accessed 28 August 2026.

³ Board of Governors of the Federal Reserve System. “Transcript of Chairman Warsh’s Press Conference, July 29, 2026.” Federal Open Market Committee Meeting Calendars and Information. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260729.pdf. Accessed 28 August 2026.

⁴ Federal Reserve Chairman Kevin Warsh. “In Our Time.” Financial Innovation: Implications for Payments and Policy, An Economic Policy Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming. August 28, 2026. https://www.federalreserve.gov/newsevents/speech/warsh20260828a.htm. Accessed 28 August 2026.  

⁵ Ibid

⁶ Ibid

⁷ Federal Reserve Chairman Jerome Powell. “Monetary Policy and the Fed’s Framework Review.” Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy, An Economic Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming. August 22, 2025. https://www.federalreserve.gov/newsevents/speech/powell20250822a.htm. Accessed 28 August 2026.

⁸ U.S. Department of the Treasury. “Treasury Announces Increased Sizes of Nominal Long-End Liquidity Support Buybacks Beginning September 9.” U.S. Treasury Press Releases. August 19, 2026. https://home.treasury.gov/news/press-releases/sb0607/. Accessed 28 August 2026.

⁹ Nvidia Corporation. “NVIDIA Announces Financial Results for Second Quarter Fiscal 2027.” NVIDIA Newsroom. August 26, 2026. https://nvidianews.nvidia.com/news/nvidia-announces-financial-results-for-second-quarter-fiscal-2027. Accessed 28 August 2026.

¹⁰ Ibid

¹¹ Ibid

¹² Northern Trust Wealth Management Research. Bloomberg data analyzed on terminal, August 28, 2026.

¹³ Ibid

¹⁴ Ibid