Stocks head into mid-August with investors acting as if they see nothing but tailwinds. Never mind that the yield on the US Treasury 10-year note is flirting with its highest levels in three years, the jobs market is softening, and the Strait of Hormuz is still essentially closed. Bulls have a strong argument: Second-quarter earnings are blowing away expectations, so good that even forsaken software stocks have rallied.
This week’s Markets Brief takes a closer look at the rally in many key software stocks, several of which are up more than 20% since reporting earnings over the last couple of weeks. There’s also a preview of earnings from major retailers, which begin reporting this week. Lastly, we have a look at whether ripples from the artificial intelligence boom are contributing to upward pressure on inflation.
The first (and perhaps biggest) casualties among the AI “loser trade” were software names. Since late 2025 and into 2026, these stocks have taken a beating on the belief that AI will undermine business models and significantly lower barriers to entry. From October 2025 through the middle of July this year, the Morningstar US Software Application Index—home to stocks such as Salesforce CRM, ServiceNow NOW and Adobe ADBE—was down roughly 27%. The overall market was up nearly 15% during that time.
However, since July 22 (the day Microsoft MSFT reported), the index has bounced back 15%. Several factors are at play, according to Dan Romanoff, senior equity analyst at Morningstar. One is that software companies are seeing efficiencies and beginning to generate revenue from their AI product offerings. In addition, he says, many software companies are more broadly focused on profitability, and that is showing up in margins. “Probably the most important thing, though, is that the narrative around AI killing software is just not happening.”
Romanoff says investors appear to be reacting bullishly to second-quarter earnings that don’t look that different from first-quarter results, which had software stocks falling. He points to Atlassian TEAM, the maker of workplace collaboration software like Jira. “Atlassian reported a great quarter, but the quarter before it was also great, and the stock sold off,” he says. To some degree, “the rebounds are more of a recognition that software was oversold.”
There are exceptions, of course. Both design software company Figma FIG and HubSpot HUBS sold off following earnings. Romanoff explains: “HubSpot is a company that does several billion dollars in revenue … and they guided down revenues by $6 million, and the stock got lit up for a 22% selloff. That was totally out of line… the quarter itself was fine.”
Then there is Figma, which had staged a roughly 67% rally from a low up through its Aug. 5 earnings. “Figma’s quarter was great. Revenues are continuing to accelerate. They continue to launch new products … But the stock sold off 13% on that news,” Romanoff says. “It had run aggressively into earnings. I view that as people just taking some profits.”
The spotlight may be on the AI infrastructure buildout, but the American consumer still matters a heck of a lot to the US economy. This coming week, some of the country’s biggest retailers will report, including Walmart WMT. In addition to demonstrating company-specific trends, these earnings will provide a picture of the health of the consumer.
One of the biggest ongoing questions is a window into the state of the so-called K-shaped economy, wherein high-income household spending has been buoyed by the continued bull market in stocks, while lower-income families are seeing their finances further pinched by rising gas prices.
Jaime Katz, a Morningstar senior equity analyst who covers Home Depot HD and Lowe’s LOW, explains what she will be watching across retailer earnings:
- Is the bifurcation of spend between high- and low-income consumers widening or narrowing?
- Has higher inflation (especially in fuel costs over the last quarter) had a discernible impact on discretionary spending? Or are consumers continuing to spend at a similar rate to last quarter, indicating more could be financing their purchases?
- If momentum for retail media ad spending is still strong, or is it starting to soften? Is the gap between Walmart and other retailers still widening in this regard, or are other retailers picking up steam?
David Swartz, a Morningstar analyst who follows both retailers and apparel-makers, says he has seen signs of a slowdown in early results. “There have been some companies, such as Under Armour UAA last week, that have reported a recent slowdown in store traffic and sales,” he says. “It seems like retailers have cut wholesale orders, especially since a lot of them ordered early for the back-to-school/holiday seasons because they feared another round of tariff increases.”
- Tues. Aug. 18: Home Depot
- Wed. Aug. 19: Lowe’s, Target TGT, TJX TJX
- Thurs. Aug. 20: Walmart
- Tues. Aug 25: Dick’s Sporting Goods DKS, Macy’s M
- Wed. Aug 26: Kohl’s KSS
- Thurs. Aug 27: Ulta ULTA, Dollar General DG
There are a few distinct narratives around the economic impact of AI; Morningstar senior economist Preston Caldwell recently did some myth-busting. One is that the technology will be disinflationary by lowering the cost of a wide range of goods and services. Federal Reserve Chair Kevin Warsh is a proponent of this, arguing that it will ultimately mean interest rates can be lower.
Bank of America economist Stephen Juneau thinks that for now, the opposite is happening, and he sees evidence of this in the July Consumer Price Index report.
The July CPI was in line with expectations. It pointed to a cooling trajectory for inflation. AI investment, however, is one factor that continues to push prices higher. Core goods surprised to the upside, rising by 0.20% month over month. A 1.4% month-over-month increase in IT commodities was a big reason, contributing 12 basis points to core goods inflation. This reflected increases in computers, software and accessories, and smartphones, as business-related AI demand is raising input costs, which are being passed on to the consumer.
We think the data continues to underscore our view that the AI investment boom is inflationary in the near term. AI is not only raising input costs for electronics, but also driving a positive wealth effect that is supporting consumer demand. The disinflationary effects of AI that Chair Warsh has been touting will have to wait a little longer.
Stephen Juneau, Bank of America economist
The author or authors do not own shares in any securities mentioned in this article.
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