Nicola Wealth Market View

August was a month of two market forces acting in opposite directions. Corporate earnings came in stronger than expected, pushing equities to fresh all-time highs. At the same time, long-term government bond yields climbed to their highest levels in nearly two decades, hurting bond prices and making stocks look more expensive relative to their earnings.  Beneath the surface, the leadership that has driven equity markets for much of the past two years began to lose its grip. 

We see these as two sides of the same story.  Strong nominal growth and record corporate profitability are good news for equity investors, but that same strength and its potential to drive inflation higher, is a central reason bond yields have risen. Layer in concerns over the growing supply of government and AI-related corporate debt, and bond investors have been left with a lot to ponder. The result is a market environment that, while still bullish, requires extra scrutiny, with a narrative that can change from positive to negative very quickly.   

Ottawa and Washington also spent much of August testing each other's resolve on trade, even as Canada's own economy showed more underlying strength than the headlines may suggest. And in Washington, the U.S. Treasury took an unusually direct hand in the bond market it oversees, a development that drew sharp criticism from investors who see it as treating a symptom rather than the underlying cause. 

In our view, August does not change the approach we have favored through this year. A market this dependent on a narrow set of leaders, financed against a backdrop of rising government and corporate borrowing costs, is exactly the environment in which a disciplined, well-diversified portfolio is required to help protect investor capital.

Key Takeaways

• Strong corporate earnings supported global equities to reach new highs in August, beating expectations by a wide margin, but gains remained concentrated in a relatively narrow group of companies 
• Beneath the index-level gains, the momentum trade that led markets for much of the past two years began to unwind and long-term government bond yields rose to their highest levels in nearly two decades, driven more by growth and debt supply than by inflation 
• U.S. federal debt passed US$40 trillion, and the Treasury's move to buy back long-term bonds drew criticism as an attempt to manage a symptom rather than the cause 
• Oil supply from the Persian Gulf continued to recover even as the war in Iran ground on, keeping prices well below their spring highs 
• Canada's economy showed more resilience than expected, even as trade tensions with the U.S. escalated further and remains a risk 
• For long-term investors, August reinforced the value of diversification across asset classes, regions, and investment styles 

Chief Economist Rob Edel works through why earnings strength and rising bond yields are two sides of the same story, what the Treasury's direct intervention in the bond market signals, and what both mean for portfolio construction. Read the full commentary below. 

Earnings did the heavy lifting, and equities reached new highs

Global equities extended their advance in August. The MSCI All Country World Index rose 2.6% for the month, with emerging markets (+3.2%) modestly outperforming developed markets (+2.5%). Asia-Pacific equities led the way (+3.1%), supported by strong gains in Taiwan (+6.3%) and Korea (+5.8%), while the S&P 500 (+2.6%) outperformed European equities (+1.3%). Canada's S&P/TSX Composite delivered another solid month, up 3.0% in Canadian dollars and 4.2% in U.S. dollars, even as trade tensions with the United States intensified through the month. 

Leadership within the U.S. market was more selective than the headline number suggests. Six of 11 sectors posted a positive return, led by energy, technology, and materials, while utilities, industrials, and real estate lagged. In Canada, only three of 11 sectors advanced, with materials up sharply on the strength of gold, and financials slipped despite broadly positive bank earnings.

The primary driver, as it has been for most of this year, was earnings. Second-quarter results came in well ahead of expectations, and the market's ability to shrug off a lengthening list of concerns, from elevated energy prices to questions about the long-term profitability of AI spending, speaks to how much weight investors continue to place on the profit outlook.

Corporate profits are booming, though the drivers deserve a closer look

The scale of the earnings beat was significant. Per-share earnings for the S&P 500 rose 53% in the second quarter from a year earlier, while sales grew nearly 16%. Even excluding investment gains at Amazon and Alphabet, earnings rose at the fastest pace since the fall of 2021. By nearly a two-to-one margin, more companies raised their profit guidance for the current quarter than lowered it, a reversal from a year ago. 

Several forces are converging to support this strength: resilient consumer spending, continued artificial intelligence-related capital spending, and a meaningful, if temporary, tailwind from refunds of tariffs paid in prior periods. Apollo Global Management estimated tariff refunds alone could add roughly four percentage points to third-quarter economic growth. Retailers from Target to Dollar General reported steady traffic even as shoppers navigate higher fuel prices, though management teams were careful to note that many core customers remain financially stretched. 

We would add one note of caution to an otherwise encouraging picture. A Bloomberg column highlighted that economy-wide corporate profits rose a striking 9% in the second quarter from the first, while total-factor productivity, a broader measure of how efficiently labour and capital are being used, fell 0.4% year-over-year. The dot-com capital spending boom, by contrast, converted its labour and capital inputs into considerably stronger economic growth.  Corporate earnings as a share of gross domestic income also reached a record high while labour's share fell to a record low, so the gains are not being shared evenly. Profits this strong, this late in an expansion, are rare, and at least part of the story appears to reflect heavy capital spending and, in some cases, circular financing arrangements between AI companies rather than organic demand alone. None of this undermines the earnings picture, but we would like to see the durability of AI-related spending confirmed by measurable productivity gains and economic growth rather than by further spending and rising profits at a select narrow group of suppliers. 

The market's momentum leaders lost their footing

One of the more notable developments beneath the index-level gains was the breakdown of the momentum trade that had powered markets for much of the past two years. A simple strategy of buying the broad market through an index fund quietly outperformed a basket of the largest technology names in August, and the swift unwind of crowded positioning in some of 2025's strongest performers served as a reminder of how concentrated recent gains have been. 

This does not necessarily signal that the broader rally is ending. A market in which leadership rotates, even abruptly, behaves differently than one in which the index itself is breaking down. But it reinforces a point we have made in prior commentaries: when a small number of companies account for an outsized share of index returns, portfolios concentrated in that leadership carry more risk than trailing performance suggests. 

Long-term bond yields climbed to their highest levels in nearly two decades

The most consequential development of the month took place in the bond market. Long-term U.S. Treasury yields rose to their highest levels since 2007, with the 30-year yield touching 5.33% in mid-August before easing modestly. By month-end, both two-year (4.34%) and 10-year (4.75%) yields sat at or near their highest levels of the year, and a 30-year Treasury auction that same month drew the highest borrowing cost since 2001. 

 This was not solely an American phenomenon. French, German, and U.K. long-term borrowing costs also rose to multi-year highs during the month, and Japanese yields continued a relentless climb of their own. The common thread across markets was a shift in who is buying government debt. Pension funds and other historically price-insensitive buyers have steadily given way to more return-sensitive private investors, a change that has pushed up the extra yield investors demand to hold long-dated bonds, known as the term premium. At the same time, a record pace of corporate bond issuance, much of it tied to financing the AI infrastructure build-out, has added further competition for the same pool of long-duration capital. 

Importantly, most of this increase appears to reflect stronger expectations for economic growth rather than a resurgence in inflation expectations, which have remained comparatively well anchored. Morgan Stanley has argued that the rise in yields reflects a “run it hot” economic regime, in which higher nominal growth, not fear of the US government budget deficit, is the primary driver, and that strong earnings growth has historically been associated with rising ten-year yields. We think that view has merit, but it does not fully explain why yields kept climbing even as some growth indicators softened later in the month. 

U.S. federal debt passed $40 trillion US, and Washington tried a new tool

Concerns over rising government debt levels likely also played a role.  U.S. federal debt surpassed $40 trillion US in August, arriving months earlier than most forecasters had expected as rising yields pushed up the government's own interest costs. Harvard economist Kenneth Rogoff argued that meaningful fiscal reform is unlikely until a genuine shock, potentially a cyberattack, an AI-related disruption, or a geopolitical conflict, forces the issue, describing an environment in which “interest rates have reversed, but Washington hasn't.” 

Against that backdrop, the Treasury Department took the unusual step of intervening directly in the bond market for its own debt. Treasury Secretary Scott Bessent announced a plan to roughly double the department's purchases of longer-dated government bonds, those maturing in 10 to 30 years, an approach commentators likened to the Federal Reserve's 2011 “Operation Twist.” The announcement briefly pulled 30-year yields lower by roughly 10 basis points before the move partly reversed. 

The reaction from markets was not uniformly favourable. Stanley Druckenmiller, an early mentor to Bessent, argued in a Wall Street Journal opinion piece that the move was a mistake, writing that “governments defending prices against fundamentals always lose.” His broader point, that the long-term Treasury yield functions as one of the only remaining checks on fiscal behaviour, is one we find persuasive. Managing the price of a signal does not change what that signal is telling us about the underlying supply of and demand for capital. 

Currency intervention added another unusual data point

The joint U.S. and Japanese intervention supporting the yen earlier in the month further exposed the Treasury Department’s growing concerns over rates, with the U.S. notably selling euros rather than dollars to fund the purchase. The move appeared designed in part to prevent Japan, the largest foreign holder of U.S. Treasuries, from having to sell those Treasuries to raise the dollars it might otherwise need. Together with the buyback announcement, it signaled a Treasury Department willing to intervene directly in markets and in policy traditionally left to the Federal Reserve, a shift some investors have described as a soft form of financial repression. 

The Federal Reserve remains genuinely divided

Views on the Federal Reserve's next move differed sharply over the month. Rising yields and above-target inflation led some market participants and strategists to argue the Fed may ultimately need to raise rates, a debate that intensified as futures pricing shifted toward a possible hike. Goldman Sachs pushed back on that view, arguing that market pricing for a near-term hike had become too aggressive given cooling retail sales, softer employment data, and moderating inflation prints, and that a September increase had become unlikely. 

We would frame this less as a disagreement about the destination and more about the path. After five years of elevated inflation, Goldman Sachs finds inflation expectations are, on net, only modestly elevated and not at immediate risk of becoming unanchored. That leaves the Fed with room to be patient, even if the bond market's own pricing continues to move around in the interim. 

Oil supply from the Persian Gulf continued to recover

Perhaps the biggest variable in determining the Fed's next move is the price of oil and its effect on inflation.  Given the uncertainty over when hostilities between the U.S. and Iran might end, and when the flow of oil through the Strait of Hormuz returns to pre-war levels, the Fed's patience is understandable.  Goldman Sachs estimates total oil exports from the Persian Gulf have recovered to roughly two-thirds of pre-war levels, or 15 to 16 million barrels a day, still well short of the pre-conflict pace but a marked improvement from the trough reached in March. Rising use of so-called dark shipping, tankers that disable their tracking transponders to avoid detection, and of ship-to-ship transfers points to producers and shippers adapting to a conflict that shipping markets now expect could persist well into 2027. 

That adaptation has helped keep a lid on crude prices, which have fallen to roughly US$90 a barrel from more than US$120 in April. The durability of that improvement depends on factors that remain difficult to predict, including how much oil China continues to draw from its undisclosed strategic reserves and how much longer Gulf producers can sustain elevated dark-shipping volumes without disruption. 

Canada's economy showed underlying strength even as trade tensions escalated

Canada's economic data surprised to the upside in August. The country added 75,100 jobs in July, well above the 20,000 economists had expected, pushing the unemployment rate down to 6.4%, its lowest level in two years. Employment gains over the prior three months were the strongest since before U.S. tariffs began, and second-quarter GDP data due at month-end was expected to show growth of roughly 3.4% on an annualized basis, the fastest pace since late 2023. 

That resilience is being tested. Washington added 50% tariffs on a further US$20 billion or so of Canadian goods in August, including electrical equipment, plastics, and plywood, prompting Canada to respond with its own countermeasures. When Canada's finance minister convened the country's leading bank economists to assess the damage, the consensus was that the economy is strong enough to absorb the hit, with the pain likely concentrated in directly affected sectors rather than spreading into a broader downturn. The risk, flagged by more than one economist in that meeting, is further escalation. The U.S. president has separately threatened additional tariffs on Canadian vehicles and auto parts, and officials in Ottawa are preparing for the trade dispute to extend well beyond the U.S. midterm elections in November. 

What this means for long-term investors

August captured the tension that has defined markets for much of this year. Earnings are genuinely strong, and that strength is broadening beyond the small group of companies that led the market higher through 2025. At the same time, that same growth, along with a rising supply of government and AI-related corporate debt, is pushing long-term borrowing costs to levels not seen in nearly two decades. 

We do not read this as a signal to retreat from equities, where earnings continue to provide a durable foundation. We do read it as a reminder that the two traditional components of a balanced portfolio are being pulled by very different forces this year, and that a bond allocation earns its place not just because yields are comfortable, but because it offers income and diversification precisely when equity leadership becomes more questionable.  Government efforts to manage bond yields directly, whether through buybacks or currency intervention, may smooth the path at the margin, but they do not change the underlying arithmetic of debt, growth, and inflation that ultimately sets the price of long-term capital. 

Our response remains the one we have favoured throughout the years: diversification across asset classes, geographies, and styles, beyond just stocks and bonds.