Wall of worry

The Fed’s need to restore its inflation-fighting credibility is likely to keep markets volatile despite resilient US economic fundamentals.

• S&P 500 earnings grew 52% year over year in the second quarter of 2026, more than twice the expected 23.6%, while revenues rose 15.5% and net profit margins reached a record 17.0%.
• The earnings strength drove the S&P 500 nearly 24% higher from its March 30 post-Iran trough to a record 7,817 on August 13, while the 10-year Treasury yield rose from 4.25% to 4.75%.
• The Iran war pushed WTI up 40% to above $100 per barrel, while gas prices increased 13% over two months to $4.30 per gallon; tariffs and AI data-center investment could add further inflation pressure.
• Six-month average payroll growth reached nearly 107,000 jobs through August, Back-to-School sales rose 5.9% year over year, and the ISM manufacturing index stayed above 52 for eight consecutive months.
• Core CPI inflation fell from 2.9% year over year in May to 2.4% in August, but the bond market still priced an 88% probability of a Fed hike on September 16, with potentially three or more quarter-point hikes by mid-2027.

Takeaway: Federated Hermes expects continued economic resilience but believes the Fed may tighten policy soon to protect its credibility, creating additional volatility for equities and bonds as energy prices and geopolitical risks remain elevated.