July 2025 Market Commentary

Market momentum heated up through July 2025 as equity benchmarks continued their climb. With Congress in summer recess and Wall Street bracing for the often challenging third quarter, investors shifted focus to corporate earnings and economic data. Despite lingering concerns over trade policies, resilient U.S. economic indicators and a robust earnings season drove the S&P 500 to repeated all-time highs. Analysts appeared to have priced in worst-case scenarios, turning every incremental trade development into a catalyst for renewed optimism.

The major U.S. indices posted solid gains in July. The S&P 500 advanced nearly 2.5%, buoyed by strong corporate earnings, AI-driven enthusiasm, and easing trade tensions. The tech-heavy Nasdaq Composite outperformed, rising 3.7% as mega-cap tech giants like Meta and Google reported earnings that exceeded expectations, setting an optimistic tone for the August reporting season. In contrast, the Dow Jones Industrial Average lagged, eking out a modest 0.1% gain, weighed down by the Federal Reserve’s reluctance to lower interest rates despite persistent calls for action.

Fixed income markets navigated a mixed landscape in July. Treasury yields trended higher as strong economic data tempered expectations for near-term Fed rate cuts. An initial bond rally, driven by softer June inflation readings, was quickly reversed by stronger job creation, persistent wage growth, and resilient consumer spending. The 10-year Treasury yield climbed from 4.25% to 4.45% during the month, reflecting investors’ skepticism of the Fed’s dovish pivot.

Credit markets, however, remained resilient. Investment-grade spreads tightened slightly amid robust earnings and steady demand for yield. High-yield bonds also performed well, supported by improving credit metrics and low default expectations. Despite the backdrop of rising rates, investors showed a willingness to accept rate volatility in exchange for favorable credit spreads, particularly in higher-quality speculative-grade issuers.

Municipal bonds underperformed Treasuries, as rising yields and seasonal technicals weighed on performance. Lighter reinvestment demand and concerns over state and local fiscal health pressured munis, especially in the intermediate range. Nevertheless, tax-exempt yields remained attractive for high-net-worth investors, supporting continued inflows into municipal funds.

The month concluded with a closely watched FOMC meeting, where the Federal Reserve left rates unchanged at 4.25%–4.50%. While this decision was widely anticipated, it sparked frustration among analysts and the White House, given the ongoing strength in labor markets and economic growth. Notably, two Fed governors dissented, marking the first double dissent against Chair Powell in over three decades. With President Trump publicly voicing dissatisfaction over Fed policy—especially following the last rate cut in November 2024—the politicization of central bank decisions remains a headline concern.

The July 2025 U.S. employment report highlighted a noticeable cooling in the labor market, as nonfarm payrolls rose by just 73,000, sharply missing expectations of over 110,000. Compounding the softness, job gains for May and June were revised down by a combined 258,000, signaling that labor market momentum has been weaker than previously reported. The extensive revisions intensified dialogue over the accuracy of government reporting, particularly over survey data, which tends to be less accurate with smaller and private. The unemployment rate rose to 4.2%, its highest level in over two years, with long-term unemployment increasing to 1.8 million, now accounting for nearly a quarter of the total unemployed population. Labor force participation edged down slightly to 62.2%, continuing a gradual erosion from earlier in the year, while the employment-population ratio also slipped to 59.6%.

The job gains that did materialize were narrowly concentrated. Healthcare added approximately 55,000 jobs, and social assistance roles grew by 18,000, underscoring ongoing strength in services tied to demographics and public support. Conversely, sectors such as construction, manufacturing, retail, transportation, and professional services showed little to no job growth in July. The federal government sector continued to shed jobs, losing another 12,000 positions, contributing to a year-to-date decline of over 84,000 jobs. Temporary help services, often considered a leading indicator of labor market health, also contracted, reflecting softer short-term hiring appetite.

Wage growth remained relatively steady, with average hourly earnings rising 0.3% month-over-month, pushing annual wage growth to 3.9%, a rate still comfortably above inflation, which hovers near 2.4%. Additionally, the average workweek ticked up to 34.3 hours, hinting at slight gains in labor utilization despite the overall slowdown in hiring. However, the labor market’s broader signals—including the rise in long-term unemployment and slowing job creation—suggest employers are becoming increasingly cautious.

This weakening employment backdrop is sharpening the debate over Federal Reserve policy. While the Fed held rates steady at 4.25%–4.50% in its July meeting, dissent among policymakers is growing, with two governors advocating for rate cuts in light of labor market fragility. Market expectations for a potential rate cut in September 2025 have risen sharply following the report. However, some strategists, including Morgan Stanley and Bank of America, caution that stubborn inflation could keep the Fed on hold longer than markets anticipate. Moreover, external headwinds—such as new tariffs, tighter immigration policies, and broader policy uncertainty add pressure to industries heavily reliant on flexible labor pools, further complicating the jobs recovery narrative.

In June 2025, U.S. inflation showed clear signs of acceleration. The Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, rose by 0.3% month-over-month, up from May’s 0.2% increase — pushing the annual PCE inflation rate to 2.6%, from 2.4% a month earlier. This rise reflected higher prices across tariff-sensitive goods categories like household furnishings and recreational items as consumers began absorbing added import costs.

Meanwhile, core PCE inflation (excluding volatile food and energy), also climbed 0.3% on the month and reached 2.8% year-over-year, matching May’s level and marking a persistent overshoot of the Fed’s 2% target. Structural pressures—such as rising rent and healthcare costs—remain key contributors, with trimmed‑mean indicators hinting at a broader stickiness in core price trends.

The Consumer Price Index (CPI) also picked up pace in June, with headline CPI rising 0.3%, translating into a 2.7% annual increase, up from 2.4% in May. Food prices rose 0.3% monthly and 3.0% annually, while energy costs rebounded with a 0.9% jump month-over-month, though still down on a year-over-year basis. Core CPI (excluding food & energy) likewise rose 0.2% month-over-month and stood at 2.9% year-over-year.

Consumer spending growth held steady in June, with personal consumption expenditures up 0.3%, contributing to a 1.4% annualized growth rate in GDP for Q2, yet spending momentum remains tepid amid elevated prices and soft real income gains.

In June 2025, the Conference Board's Leading Economic Index (LEI) fell by 0.3%, declining to 98.8, following a flat reading (revised upward) in May. Over the first half of the year, the LEI has dropped by 2.8%, more than double the –1.3% contraction recorded during the second half of 2024. This extended downturn triggered the LEI’s recession indicator for the third straight month: the diffusion index over six months remained below 50, and the six-month annualized growth rate remained negative—two classic recession-signaling thresholds.

When looking beneath the headline figure, just four out of ten LEI components are not in negative territory over the first half of 2025. Stock market gains—via the S&P 500—and the leading credit index were the most substantial positives. Conversely, weak consumer expectations, sluggish manufacturing new orders, and increasing weekly initial jobless claims weighed heavily on the index in June. Other declining components included indicators tied to building permits and interest rate spreads, suggesting cooling activity in housing and credit conditions.

Meanwhile, the Coincident Economic Index (CEI), which reflects current economic conditions, rose by 0.3% to 115.1, with all four components—including payroll employment, personal income (excluding transfers), industrial production, and manufacturing & trade sales—posting gains in June. The Lagging Index (LAG) remained flat at 119.9, although its six-month growth turned positive at +1.4% annualized, reversing a prior decline.

Collectively, these dynamics portray a U.S. economy confronting growing headwinds ahead, even as current data remain stable. The persistent LEI decline reflects diminished consumer and business sentiment, weak new orders, and early signs of labor market softness. Yet, coincident trends suggest that growth is still chugging along—albeit at a slower pace—with CEI gains moderating but still positive. As such, while no recession is officially forecasted, the LEI’s trajectory and recession signal underscore the risk of a significant slowdown in economic activity later in 2025 or into 2026.

In July 2025, the U.S. finalized several high-profile trade agreements as President Trump’s reciprocal tariff strategy neared key enforcement deadlines. The most significant breakthrough came with the European Union, which agreed to a framework that imposes a 15% tariff on most EU exports—including autos, semiconductors, and pharmaceuticals—in exchange for a $600 billion EU investment into the U.S. and a $750 billion commitment to purchase U.S. energy through 2028. While the deal was hailed as a victory for U.S. manufacturing and energy sectors, it sparked backlash among European leaders who criticized its one-sided nature. Despite these tensions, the agreement provided a strong catalyst for U.S. equity markets, with the S&P 500 and Nasdaq 100 reaching fresh highs.

Further agreements were reached with South Korea and Japan, which negotiated a similar arrangement involving a 15% tariff on exports, hundreds of billions in investment commitments into U.S. strategic sectors, and an agreement to buy $100 billion worth of U.S. energy. However, some of the investment terms remained vague at month-end, reflecting the hurried nature of these negotiations. Additionally, a preliminary trade framework was announced with Pakistan, focusing on energy sector development and reciprocal tariff reductions, though concrete investment figures were left unspecified.

Despite these headline deals, a number of key trading partners—including Canada, India, Mexico, China, Taiwan, and Switzerland—remained holdouts as of July 31. An initial tariff enforcement deadline of July 9 was pushed back to August 1, only to be further staggered between August 7–12, depending on country and product category. Late in July, President Trump and Mexico President Sheinbaum announced a further 90 days to negotiate a deal on non-USMCA goods. With negotiations dragging on, the U.S. administration sent informal “letters” to these nations outlining proposed tariff terms, rather than formalized agreements, leading to growing frustration among diplomats and trade officials. Canada, in particular, faced the looming threat of a 35% tariff on its exports, with officials scrambling to negotiate a resolution as the August deadlines approached.

Market participants grew increasingly concerned that the U.S. was weaponizing trade policy for political leverage rather than forging durable agreements. Analysts pointed to the lack of legal frameworks behind many of these deals, raising questions about their enforceability. Meanwhile, the politicization of trade negotiations—marked by public statements from the White House pressuring the Federal Reserve and leveraging tariff threats as bargaining chips—cast a shadow over global investor confidence. The Sentix Eurozone Investor Confidence index fell sharply at month-end, reflecting mounting fears of fragmented trade relationships and policy unpredictability. As August approached, markets remained buoyant on headline optimism, yet underlying concerns over the fragile and ad hoc nature of these trade agreements persisted.

Although August is typically a quieter month for markets, overall optimism for the remainder of 2025 remains robust. In early July, several leading firms raised their year-end S&P 500 price targets. Goldman Sachs increased its 12-month forecast from 6,100 to 6,600, citing stronger-than-expected earnings, the prospect of earlier Federal Reserve rate cuts beginning in September, and valuations supported by resilient mega-cap technology stocks. By late July, Wells Fargo Investment Institute followed suit, lifting its target range from 5,900–6,100 to 6,300–6,500, driven by easing trade tensions—particularly U.S.–EU and U.S.–Japan agreements—favorable tax incentives, and upward revisions to growth and earnings-per-share estimates. Other notable adjustments included Jefferies’ modest increase from 5,300 to 5,600. Perhaps most significant was Oppenheimer strategist John Stoltzfus reinstating his previous bullish stance, placing his target near 7,100 on the back of trade progress and strong corporate margins. Overall, bottom-up analysts estimated on July 2 that the S&P 500’s target price stood at approximately 6,695, implying roughly 7.5% upside from the July closing level of 6,227.

While concerns persist that Fed inaction could trigger an emergency 50 basis-point cut later this year, the current easing cycle mirrors last year’s path. The CME FedWatch tool currently prices in nearly a 90% chance of a 25 basis-point cut at the September 17 FOMC meeting and a 64% probability of a cumulative 50 basis-point reduction by the October 29 meeting—similar to the 50 basis-point cut executed in October 2024. By year-end, the market expects about a 53% chance of total rate cuts reaching 75 basis points from current levels.

Trading volumes typically remain subdued through the summer months, but investors should remain vigilant amid ongoing price volatility. Economic and earnings data will continue to guide positioning, but the fundamental outlook for the U.S. economy remains positive. Strong Q2 GDP growth, a resilient labor market, sustained consumer spending, and growing optimism around artificial intelligence are fueling market momentum. While the largest AI players and data center builders trade at high valuations, broader opportunities exist across many sectors as AI adoption accelerates. Insurance firms are improving efficiency through automation in the underwriting process. Industrials, including Aerospace & Defense, benefit from evolving AI defense technologies. Utilities gain from increased power demand tied to AI data centers and grid modernization. Healthcare advances with AI-assisted drug development despite government spending pressures. We continue to monitor developments across the market for real, data-driven improvements from the deployment of AI.

AI’s rapid integration across industries is a key differentiator, creating potential winners throughout the economy. This technological shift, coupled with anticipated interest rate cuts, is also expected to spur renewed merger and acquisition activity. While speculative investing presents risks, it also uncovers innovative breakthroughs. In this dynamic environment, patience is essential to identify high-quality opportunities amid market noise.