U.S. markets headed into Thursday with a cautiously positive tone after softer inflation data buoyed equities and pulled Treasury yields lower. Artificial intelligence stocks remained among the market's strongest performers, though traders were keeping a close eye on the U.S. PPI inflation report and resurgent risks from oil and geopolitics.

While analysts and traders celebrated the continued AI trade — even as some warned it may be oversold — Cisco's post-earnings reaction threatened to dampen the mood. The networking giant briefly touched a fresh all-time high after reporting Wednesday evening, only to sell off more than 6%.

U.S. Stocks Continue to Be Powered by AI

The S&P 500 closed at 7,748.50, up 0.26%, while the Nasdaq gained 0.54% to 26,588.49. The Dow slipped 0.04%.

Several AI-related stocks posted far larger moves:

• Nebius: approximately +34%
• CoreWeave: approximately +19%
• Super Micro: approximately +19%
• Micron: +4.9%
• Nvidia: approximately +3%

The prevailing narrative is straightforward: investors remain willing to pay premium valuations for companies tied to AI infrastructure, semiconductors, data centers, and computing demand. A rising stock market does not lift every name equally, and AI-related companies are currently doing the heavy lifting. The breadth of that rally — spanning cloud infrastructure providers like CoreWeave, AI-specialized hardware makers like Super Micro, and established chip leaders like Nvidia — reflects how capital spending on AI has rippled across multiple layers of the technology stack.

Softer Inflation Lends Support

U.S. inflation came in slightly cooler than expected. July CPI rose just 0.1% from the previous month, while annual inflation slowed to 3.4% from 3.5%.

This matters because the Federal Reserve relies on inflation data when determining whether interest rates need to remain elevated or move higher still. Policymakers pay particular attention to core inflation measures that exclude food and energy, since those components can swing sharply for reasons unrelated to underlying demand pressures. Markets now assign roughly a 40% probability to a September Fed rate hike, down from about 54% one week earlier.

Higher interest rates make borrowing more expensive for companies and consumers alike, and can make bonds more attractive relative to stocks. This dynamic is particularly relevant for fast-growing technology companies, where investors are frequently paying today for profits expected years into the future. Lower rate expectations can therefore bolster technology and growth equities.

The next inflation test arrives with U.S. producer prices, or PPI. PPI measures changes in prices received by producers; traders monitor it because elevated costs at the producer level can eventually feed through to consumers and keep inflation persistently high. For that reason, PPI is often watched as a leading indicator for the consumer inflation readings that most directly shape Fed policy decisions.

Treasury Yields Edge Lower

The 10-year U.S. Treasury yield hovered around 4.68%, down slightly from Wednesday. The 10-year yield functions as one of the most consequential interest rates in global markets. When Treasury yields rise sharply, equities can face pressure as investors gain a more attractive low-risk alternative. When yields fall, growth stocks often find breathing room.

For investors, the relationship is straightforward: higher yields can become a headwind for stocks, while lower yields can serve as a tailwind — especially for technology shares.

The U.S. Dollar Index stood near 99.96, while USD/JPY traded around 159.33.

Gold Pauses After a Strong Rally

Gold pulled back modestly, with spot gold near $4,384 per ounce and December futures around $4,441. The move appears more consistent with profit-taking after a sharp advance than a fundamental shift in the bullion narrative. Gold remains up more than 8% in August.

One driver of gold's strength: diminished expectations for further Fed rate hikes can enhance the metal's appeal. Gold pays no interest, so when investors anticipate that rates will stop climbing, the opportunity cost of holding gold decreases.

Silver traded around $65.09.

Oil Falls but Remains a Major Market Risk

Brent crude hovered near $87.95, while WTI traded around $82.19. Oil remained under pressure as expectations for global demand softened and U.S. crude inventories increased sharply — a bearish signal for near-term prices.

However, the unresolved U.S.-Iran dispute surrounding the Strait of Hormuz continues to pose a significant upside risk. The Strait of Hormuz is one of the world's most critical energy shipping routes. Any serious disruption to oil supplies through the region could send crude prices surging rapidly, with consequences extending far beyond the energy market.

Higher oil prices can increase transportation, manufacturing, and energy costs throughout the economy, potentially pushing inflation higher. If inflation rebounds, the Fed may have less room to cut rates and could even consider further tightening. The transmission chain can unfold as follows: oil rises sharply → inflation risk increases → Treasury yields may climb → Fed expectations turn more hawkish → equities come under pressure.

This makes oil one of the most important macro markets to monitor.

Wheat and Food Prices Present Additional Risks

The conflict around the Black Sea continues to disrupt agricultural markets. A Ukrainian strike on Novorossiysk, a key Russian grain-export hub, interrupted operations and contributed to higher grain prices. Simultaneously, attacks and restrictions affecting Ukraine's Black Sea infrastructure have sharply curtailed Ukrainian grain exports. Together, Russia and Ukraine normally account for a substantial share of global wheat exports, meaning disruptions to either country's shipping corridors can reverberate through food supply chains worldwide.

If grain prices remain elevated, the effects can eventually surface in everyday consumer products including bread, pasta, breakfast cereals, animal feed, and meat and dairy production costs. Movements in wheat futures tied to Russia or Ukraine are not merely a trader story — they can ultimately become a supermarket story.

Cisco Demonstrates Why Strong Earnings Aren't Always Enough

Cisco shares fell more than 4% in after-hours trading despite reporting robust growth and providing a solid revenue outlook. The company also disclosed that AI infrastructure orders from large cloud customers reached $4 billion during the quarter. That figure underscores how AI-related capital spending is extending beyond semiconductors into networking equipment, as large cloud operators build out the high-speed data center interconnects needed to move vast quantities of training and inference data.

The stock declined because markets do not simply react to whether results are good in absolute terms — they react to whether results exceed or fall short of what investors had already priced in. Cisco had climbed more than 60% year-to-date, leaving expectations extraordinarily elevated.

A company can report solid earnings and still see its shares decline. When investors have already anticipated exceptional numbers, very good may not be sufficient. The market trades the gap between expectations and reality.

Cerebras Offers Another Lesson in AI Stock Dynamics

Cerebras shares dropped approximately 16% after hours after quarterly revenue missed expectations. The company actually raised its full-year revenue forecast, but investors were simultaneously disappointed by weaker profit margins.

This illustrates what can unfold when a stock carries an extremely rich valuation. When expectations are low, a company can sometimes rally on an unremarkable report. When expectations are sky-high, even a minor disappointment can trigger a significant selloff. The faster a stock rises and the more optimism investors embed into its price, the less margin there is for error — a consideration particularly relevant in the current AI stock environment.

Market Setup and Key Risks Ahead

The current market backdrop remains relatively constructive: inflation has softened, Treasury yields have drifted lower, AI spending stays robust, and technology stocks continue to lead.

Yet risks persist. The S&P 500 is already near record levels, meaning investors have priced in substantial good news. Today's PPI inflation report represents the next immediate test. Crude oil remains one of the largest risks outside the equity market — if oil continues to fall, it could support the disinflation narrative, but if geopolitical tensions suddenly push Brent sharply higher, inflation concerns could resurface quickly.

The broader lesson: do not watch stocks in isolation. Monitor inflation, Treasury yields, and oil simultaneously, as any of these can reshape the entire market narrative.

Particular attention should be paid to whether Cisco sustains its post-earnings bearish move and how it influences other chip stocks. The next earnings session carries heightened significance, as it could either confirm a bearish transition or reveal this as another false signal in an unusually high-dispersion earnings season.