Wolfe Research believes the U.S. economy has entered the third stage of its market cycle framework, known as Late Acceleration, following a strong July ISM Manufacturing report. The shift comes as major U.S. equity indices started August with solid gains, while artificial intelligence infrastructure investment and an emerging inventory rebuild continue to support manufacturing activity.
US market cycle moves into Late Acceleration
Wolfe Research identified the transition following the release of July’s ISM Manufacturing figures last Monday.
The firm’s cycle framework is based on the six-month moving average of the ISM New Orders component, which it uses to assess changes in the direction and momentum of the economy.
According to Wolfe, the latest improvement indicates that the U.S. has progressed into Late Acceleration, a mid-cycle phase historically associated with continued economic expansion but a more mature stage of growth.
Major US indices start August strongly
The shift has coincided with a strong beginning to August for U.S. equities.
The S&P 500 advanced 3.6%, while the NASDAQ-100 gained 5.1% and the Russell 2000 increased 3.5%.
The S&P 500 also reached fresh all-time highs and broke above the trading range that had contained the benchmark for approximately two months.
The performance suggests that investors have responded positively to improving manufacturing momentum despite continuing uncertainty surrounding inflation and monetary policy.
AI spending helps drive manufacturing expansion
Wolfe Research attributed part of the improvement in manufacturing conditions to substantial capital spending by hyperscale technology companies on artificial intelligence infrastructure.
The expansion of data centres and related AI computing capacity has created significant demand across parts of the industrial and technology supply chains.
Another factor has been the decline in wholesale inventories relative to sales.
Lower inventory levels have encouraged companies to begin rebuilding stocks, providing an additional source of economic activity and supporting Wolfe’s view that the cycle has entered a stronger expansion phase.
Wolfe expects cycle peak around late 2026 or early 2027
The Late Acceleration phase is expected to continue until the six-month moving average of ISM New Orders reaches its peak.
Wolfe Research anticipates that this could happen towards the end of 2026 or in early 2027, potentially as the headline ISM measure approaches 60.
A peak in new-order momentum would signal another transition in the firm’s market-cycle framework and could change which areas of the equity market are positioned to outperform.
Until then, the firm sees the current environment as broadly consistent with a continuing mid-cycle expansion.
Inflation and Fed policy remain important
Inflation data remains another major consideration for investors as they assess the durability of the expansion.
Wolfe highlighted July’s CPI and PPI reports as important indicators for the interest-rate outlook.
Expectations for a Federal Reserve rate increase at the September policy meeting have declined following weaker-than-expected payroll figures, potentially reducing one source of pressure on equity valuations.
The interaction between stronger manufacturing activity and the direction of inflation will remain important in determining how monetary policy develops over the coming months.
Technology and Energy among sectors historically favoured
Wolfe Research said Late Acceleration has historically been favourable for Technology, Energy, Financials, Health Care and Industrials.
Technology could continue to benefit from the large-scale AI infrastructure investment that is already contributing to manufacturing activity, while Industrials may gain from stronger capital expenditure and inventory rebuilding.
Energy and Health Care also feature among the sectors that have historically performed well during this stage of the cycle.
Despite Financials normally benefiting during Late Acceleration, Wolfe remains underweight the sector.
The firm cited uncertainty surrounding interest-rate policy under the Kevin Warsh regime and the possibility of an inverted yield curve during the first half of 2027 as reasons for maintaining a more cautious position.
Investors watch for durability of US expansion
Wolfe Research’s move to a Late Acceleration classification suggests that the firm sees further room for the current U.S. economic expansion to develop before the cycle reaches its next turning point.
Strong equity performance, AI-related capital spending and inventory rebuilding support that view, although inflation and Federal Reserve policy remain potential sources of volatility.
The trajectory of ISM New Orders will be particularly important, with Wolfe expecting the indicator to peak towards late 2026 or early 2027. That turning point could ultimately signal the end of the current phase and another shift in market leadership.