The U.S. market cycle has shifted into a Late Acceleration phase, according to Wolfe Research, after July’s ISM Manufacturing data provided further evidence of strengthening economic momentum. Robust AI infrastructure spending and an emerging inventory restocking cycle are helping drive the expansion, while U.S. equities have responded with strong gains at the start of August.
ISM data triggers market-cycle shift
Wolfe Research uses the six-month moving average of ISM New Orders as the central indicator in its market-cycle framework.
Following the latest manufacturing report, the measure has moved sufficiently to place the U.S. economy in Late Acceleration, the third phase identified by the firm’s model.
The classification points to an economy that remains in expansion but has moved further through the middle portion of the broader business and market cycle.
The next transition is expected once momentum in ISM New Orders reaches a peak.
US stocks rally as expansion gains momentum
Major U.S. equity benchmarks have performed strongly during the opening part of August.
The S&P 500 gained 3.6%, while the NASDAQ-100 advanced 5.1% and the Russell 2000 climbed 3.5%.
The S&P 500 also broke out of a roughly two-month trading range and reached new record highs.
The combination of improving economic indicators and strong equity performance has reinforced Wolfe’s assessment that the market has entered another stage of the expansion.
Hyperscaler AI investment drives industrial demand
One of the forces behind the stronger manufacturing environment is the enormous investment being made in artificial intelligence infrastructure.
Hyperscale technology companies continue to spend heavily on data centres, computing hardware and the wider infrastructure required to develop and operate increasingly sophisticated AI systems.
That spending is generating demand throughout technology and industrial supply chains and has become an increasingly important component of U.S. capital expenditure.
At the same time, wholesale inventories have declined relative to sales, encouraging businesses to rebuild stocks.
This restocking process provides another potential source of manufacturing demand as companies replenish depleted inventories.
Late Acceleration could continue into 2027
Wolfe Research expects the current market phase to remain in place until the six-month moving average of ISM New Orders reaches its eventual peak.
The firm believes that turning point could arrive late this year or during the opening part of 2027, potentially as the headline ISM index approaches 60.
Until then, the continued improvement in manufacturing momentum could provide a supportive backdrop for economically sensitive areas of the equity market.
Once new orders begin to peak, however, Wolfe’s framework would indicate that another market-cycle transition is approaching.
Fed expectations shift after weaker payrolls
Monetary policy remains an important variable for the outlook.
Investors are assessing inflation figures alongside signs of stronger manufacturing activity to determine whether economic acceleration could eventually generate renewed price pressures.
Expectations for the Federal Reserve to raise rates in September have declined following a weaker-than-expected payrolls report.
That change could provide some support for risk assets, although the path of inflation will remain critical to determining the Fed’s next moves.
Five sectors historically benefit from Late Acceleration
Wolfe Research identified Technology, Energy, Financials, Health Care and Industrials as sectors that have historically performed well during Late Acceleration.
Technology remains particularly exposed to the AI investment boom that is helping fuel the current manufacturing expansion.
Industrials could also benefit as capital expenditure and inventory restocking generate additional demand, while Energy has historically performed favourably as economic activity strengthens.
Wolfe nevertheless remains underweight Financials despite the sector’s typical performance during this phase.
The firm pointed to volatile interest-rate policy under the Kevin Warsh regime and the risk that the yield curve could invert during the first half of 2027.
ISM New Orders becomes key signal for next market move
For investors, Wolfe Research’s framework places particular importance on the direction of ISM New Orders over the coming months.
Continued improvement would support the view that the U.S. remains firmly in Late Acceleration, while an eventual peak would signal that the current phase is nearing completion.
With AI investment, inventory rebuilding, inflation and Federal Reserve policy all influencing the outlook, sector leadership could continue evolving as the market progresses through the cycle.
Leave a Reply