July 2026 Commentary

July represented a pause following strong second-quarter performance, as investors shifted attention toward earnings, valuations, and AI-related capital spending. Following a 15% gain in the S&P 500 during the second quarter, markets entered July with elevated expectations. Although second-quarter earnings generally exceeded consensus forecasts, management commentary increasingly highlighted the scale of capital expenditure required to build next-generation AI infrastructure. Those discussions prompted investors to reassess how quickly these investments could translate into profitable growth. Rather than broad-based market weakness, the month was defined by rotation beneath the surface as leadership shifted across sectors and styles. ^12,13

Macroeconomic developments also played a role in shaping investor sentiment. The easing of geopolitical tensions following the Iran ceasefire helped stabilize global energy markets, while economic data continued to portray a resilient U.S. economy. Inflation showed further signs of moderating outside of energy-related components, and the labor market remained healthy despite evidence that hiring activity continues to normalize. At the same time, investors increasingly accepted that the Federal Reserve is likely to maintain a "higher-for-longer" interest rate policy until additional evidence confirms that inflation is returning sustainably toward its 2% target. The combination of resilient economic growth and moderating inflation supported expectations that the economy could continue moving toward a soft landing. ^5,7,10

The month also highlighted a broadening of market leadership. While many of the year's largest artificial intelligence winners experienced profit-taking, capital rotated into sectors tied to energy, financials, and real estate. Strong second-quarter earnings from banks supported confidence in the health of the financial system, while continued strength in commodity prices supported energy companies. Investors increasingly favored sectors with improving earnings revisions, relatively favorable valuations, and more immediate cash flow generation, reflecting a shift from momentum-driven investing toward a greater emphasis on fundamentals. ^12,13

The S&P 500 finished July essentially unchanged, declining 0.1% for the month as gains in cyclical and value-oriented sectors were largely offset by weaknesses across technology. The Nasdaq-100 declined 2.8%, extending June's rotation away from many of the market's largest AI-related companies as investors reassessed valuations following an exceptional first-half rally. In contrast, the Dow Jones Industrial Average advanced 2.1%, outperforming broader indices for a second consecutive month as industrial, financial, and energy companies continued attracting investor interest. ¹²

Sector performance reflected one of the most pronounced rotations of the year. Energy led all S&P 500 sectors with a 12.5% gain, benefiting from higher crude oil prices, improving refining margins, and renewed optimism surrounding global energy demand. Financials followed with a 6.0% return after another strong bank earnings season highlighted resilient loan growth, healthy credit quality, and improving net interest income. Real Estate gained 2.5%, while Health Care rose 2.2%, supported by defensive positioning and continued earnings resilience. Consumer Staples added 1.9%, with Consumer Discretionary (0.8%) and Communication Services (0.5%) posting modest gains. ¹²

Technology remained the month's weakest-performing sector, declining 3.5% as investors took profits in many of the year's strongest AI beneficiaries and shifted their focus toward companies capable of generating stronger near-term cash flows. Industrials fell 3.1% after leading the market in June, while Utilities declined 2.3% as Treasury yields moved modestly higher. Materials also slipped 1.7%, reflecting softer demand expectations for certain industrial commodities. Despite the sector rotation, the broader market remained stable, suggesting that investors were reallocating capital rather than exiting equities altogether. This broader market breadth is notable, as leadership continues to extend beyond the narrow group of mega-cap technology companies that fueled much of the market's gains over the past two years.

Fixed income markets came under renewed pressure in July as Treasury yields moved higher across the yield curve. While the Federal Reserve maintained the federal funds target range unchanged, longer-dated Treasury yields continued to move sharply higher which may reflect investor concerns regarding persistent inflation risks, elevated fiscal deficits, Treasury issuance, and the long-term trajectory of U.S. government debt. ^9,10

One development during the month was the divergence between the federal funds rate and longer-term interest rates. While the Federal Reserve maintained its target range for the federal funds rate at 3.50% to 3.75%, longer-term Treasury yields remained elevated during July. At the beginning of the month, the 10-year Treasury yield stood at 4.48%, while the 30-year Treasury yield was 4.97%. The persistence of higher longer-term yields illustrates that market interest rates can remain elevated even when the Federal Reserve does not raise its policy rate, with implications for financing conditions across residential housing, commercial real estate, infrastructure, and other long-duration investments. ^9,10

The divergence may reflect a combination of factors influencing the longer end of the yield curve. These may include expectations for the longer-run path of interest rates and inflation, elevated federal borrowing needs, and changes in the supply and demand dynamics for U.S. Treasury securities. Long-term Treasury yields can also incorporate additional compensation for inflation, interest-rate, and duration risk. As a result, longer-term yields may remain elevated or rise even when the Federal Reserve does not increase its policy rate, reflecting broader market expectations and risk considerations rather than a direct change in monetary policy.

The rise in yields has important implications across financial markets. Higher long-term interest rates increase discount rates used to value future cash flows, placing the greatest pressure on long-duration assets such as high-growth technology companies, early-stage innovators, private equity, venture capital, and commercial real estate. This dynamic helps explain the continued rotation away from many of the year's highest-multiple artificial intelligence companies despite continued strength in corporate earnings. Investors are becoming increasingly selective, favoring businesses capable of generating strong free cash flow today rather than those whose valuations depend heavily on earnings many years into the future.

Credit markets, however, remained resilient despite the increase in Treasury yields. Investment-grade corporate bond spreads stayed relatively tight, indicating that investors continue to view corporate balance sheets as fundamentally healthy. Companies with strong credit profiles maintained access to capital markets, although financing costs continued to rise alongside benchmark Treasury yields. Higher-quality issuers were able to absorb these costs given strong cash flows and healthy earnings, while more speculative borrowers faced a more challenging financing environment.

According to the U.S. Bureau of Economic Analysis (BEA), the U.S. economy expanded at an annualized rate of 1.5% during the second quarter of 2026. While growth slowed from the 2.1% pace recorded in the first quarter, the underlying composition of GDP paints a more favorable picture than the headline figure alone suggests. Consumer spending remained resilient, business investment continued to get support from the artificial intelligence infrastructure build-out, and government spending moderated, signaling a healthier balance between public and private sector contributions to economic growth. ¹

Consumer spending, the largest component of GDP, contributed approximately 2.12 percentage points to second-quarter real GDP growth, demonstrating that households continue to spend despite higher energy prices and elevated borrowing costs. Growth was broadly balanced between goods and services, indicating that consumers have not meaningfully pulled back on discretionary spending in response to recent inflationary pressures. Within goods spending, purchases of durable goods—including furniture, appliances, and automobiles—accounted for roughly half of the increase. Durable goods purchases are often viewed as a measure of consumer confidence because households are generally more willing to make large, long-term purchases when they feel secure about their financial outlook and the broader economy. ¹

Private investment contributed approximately 0.53 percentage points. Fixed investment rose 1.20 percentage points to real GDP growth, more than offsetting a 0.67 percentage-point decline in private inventories. Residential fixed investment posted a modest increase, while most of the growth came from non-residential investment, particularly in data centers and other digital infrastructure supporting the rapid expansion of artificial intelligence. The continued strength in business investment may underscore that corporations remain willing to deploy capital despite higher financing costs, although investment activity remains heavily concentrated on AI-related projects. ¹

Government spending subtracted 0.14 percentage points. Federal government expenditures subtracted 0.26 percentage points from real GDP growth, as reductions in non-defense spending more than offset military outlays. In contrast, state and local government spending increased 0.12 percentage points. While policymakers have suggested that state and local governments are offsetting reductions at the federal level, the available data provides insufficient evidence to conclude that this represents a meaningful transfer of spending responsibilities. Instead, the figures may suggest a relatively stable level of government activity overall, with a modest shift in composition rather than a notable change in aggregate spending. ¹

The trade balance remained a drag on economic growth, reducing GDP growth by approximately 1.01 percentage points during the quarter. Exports contributed approximately 0.50 percentage point to real GDP growth, driven primarily by higher shipments of petroleum and related products, although those gains were partially offset by weaker exports of services, particularly travel and financial services. Imports subtracted approximately 1.51 percentage points from real GDP growth. Because imports are subtracted in the calculation of GDP, an increase in imports results in a negative contribution to GDP growth. The trade figures therefore weighed on the headline growth rate during the quarter. ¹

Taken together, the second-quarter GDP report points to an economy that continued to expand despite slower headline growth. Consumer spending and private investment provided positive contributions, while government spending and net exports weighed on the overall growth rate. Although the pace of expansion moderated during the quarter, the underlying composition of GDP may suggest continued economic resilience rather than signaling the onset of a broader economic slowdown. ¹

In July, South Korea’s equity market experienced a sharp correction following a significant rally earlier in the year. The KOSPI fell substantially from its June peak as investors reassessed valuations following strong gains in technology and artificial intelligence-related companies. Semiconductor companies, including Samsung Electronics and SK Hynix, were among the major contributors to both the earlier advance and subsequent decline. ^2,3

The correction was also influenced by the unwinding of leveraged positions. Following the market’s earlier gains, investors had increased exposure through leveraged exchange-traded funds and other strategies that amplified movements in underlying securities. As the market declined, ETFs and hedge funds reduced leveraged positions, contributing to additional selling pressure. Barron’s reported in late July that the leveraged ETF unwind was likely largely complete and that hedge funds had completed approximately 90% of their deleveraging, according to J.P. Morgan. ²

Market concentration further contributed to volatility. Samsung Electronics and SK Hynix represent a sizable portion of the South Korean equity market, making movements in these companies particularly influential on the broader index. The Economic Times reported that the two semiconductor companies together accounted for nearly half of the KOSPI’s weight during the correction. Their influence illustrates how a market concentrated among a relatively small number of large companies can experience greater index-level volatility when those companies move sharply. ³

Although the circumstances surrounding South Korea’s correction were specific to its market, the episode illustrates the risks associated with leverage and concentrated positioning. Leverage can magnify both gains and losses, while significant exposure to a relatively small number of securities can increase their influence on overall portfolio or index performance. Maintaining appropriate diversification and managing the use of leverage may help reduce exposure to these risks. ^2,3,4

The June inflation data, released in July, marked a noticeable reversal following the energy-driven price increases observed over the previous several months. The Consumer Price Index (CPI) declined 0.4% month-over-month on a seasonally adjusted basis after increasing 0.5% in May, representing the largest monthly decline in headline inflation since April 2020. On a year-over-year basis, headline inflation eased to 3.5%. As highlighted in previous market commentaries, the recent volatility in headline inflation has been driven primarily by fluctuations in energy prices stemming from the conflict in Iran rather than broad-based inflationary pressures across the economy. ⁵

The sharp decline in energy prices was the primary driver of the improvement in June's Consumer Price Index (CPI). The energy index fell 5.7% during the month, following increases of 3.9% in May, 3.8% in April, and 10.9% in March. Declining gasoline and other energy prices more than offset continued price increases in categories such as shelter and food, making energy the largest contributor to the overall decline in the CPI. In contrast, food inflation remained relatively modest. The food index increased by 0.2% in June, with both food at home and food away from home rising by the same 0.2%, indicating stable but persistent upward pressure on food prices. ⁵

Perhaps the most noticeable development came from Core CPI, which excludes the more volatile food and energy components and provides a measure of underlying inflation trends. Core CPI was unchanged during the month, indicating that price pressures across the broader economy remain well contained. Several categories posted outright declines, including motor vehicle insurance, communication services, apparel, medical care, and used vehicles. Recreation, household furnishings and operations, and personal care increased modestly. On a year-over-year basis, Core CPI increased 2.6%, continuing to trend much closer to the Federal Reserve's long-term inflation objective than the headline figure. ⁵

Taken together, the June inflation report reinforces the view that the inflationary surge experienced during the spring could have been a consequence of geopolitical disruptions rather than a reacceleration of underlying price pressures. With energy prices retreating following the easing of tensions in the Middle East, headline inflation has begun converging toward the more stable trend reflected in core inflation. For Federal Reserve policymakers, the report provides additional evidence that the recent spike in inflation may have been transitory in nature, although officials are likely to seek several more months of similar data before gaining sufficient confidence to begin easing monetary policy. For investors, the report may suggest the broader narrative that inflation continues to normalize, even if short-term geopolitical events periodically interrupt the disinflationary trend. ⁵

The final University of Michigan Consumer Sentiment Index improved to 55.2 in July 2026, marking the first reading above 50 this year and extending the recovery in consumer confidence that began following the easing of energy prices. Improvements were broad-based across nearly every demographic group, including income, education, wealth, age, and political affiliation, suggesting that confidence strengthened across the economy rather than within a narrow segment of consumers. ¹¹

Consumers also became somewhat more positive about the longer-term outlook. Expectations for business conditions over the next five years climbed to their highest level in 12 months, indicating increased confidence that the economy may continue to improve despite elevated interest rates and recent geopolitical uncertainty. Nevertheless, the index remains well below its long-term historical average, indicating that optimism remains measured rather than elevated. ¹¹

Despite the recent improvement, consumer sentiment remains 11% below its level one year ago, underscoring the lasting effects of several years of elevated inflation and higher living costs. Although headline inflation has moderated considerably from its peak, many households continue to grapple with permanently higher prices for essential goods and services. As a result, consumers remain primarily focused on purchasing power, household finances, and the affordability of everyday expenses rather than broader political or geopolitical developments. ¹¹

The July survey suggests that consumers appear more confident that the worst of the inflation shock has passed, but confidence has not yet fully recovered. Improving sentiment, a labor market that continues to expand, and moderating inflation provide additional evidence of continued economic stability. However, the gap between current sentiment and historical norms also indicates that many households remain cautious, suggesting that consumer spending is likely to remain disciplined rather than accelerate meaningfully in the near term. ^5,7,11

The U.S. labor market remained resilient in June, although hiring continued to normalize following the stronger employment gains recorded earlier in the year. Nonfarm payrolls increased by 57,000 jobs, broadly in line with the average monthly gain of 36,000 over the previous 12 months. At the same time, the unemployment rate edged down to 4.2%, its lowest level in nearly a year. This may suggest that labor demand continues to absorb available workers despite a more measured pace of hiring. ⁷

Employment gains remain concentrated in service-oriented industries. Professional and business services led the month with 36,000 new jobs, extending a steady recovery that has added 172,000 positions since the sector's recent low in October 2025. Social assistance added 25,000 jobs, including 17,000 in individual and family services, well above its 12-month average monthly gain of 16,000. Healthcare continued its long-standing expansion, adding 22,000 jobs, including 9,000 in hospitals. Although healthcare hiring slowed from its 12-month average of 38,000 jobs per month, the sector remains one of the most consistent contributors to overall employment growth. ⁷

Not all sectors shared the month's gains. Leisure and hospitality employment declined by 61,000 jobs, reflecting weaker-than-normal seasonal hiring during what is typically one of the industry's busiest periods. As a result, employment in the sector has shown little net growth thus far in 2026, suggesting consumers remain selective in their discretionary spending despite improving confidence and a healthy labor market. ⁷

Average hourly earnings continued to indicate a balanced labor market. Wages increased 0.3% month over month, while annual wage growth remained at 3.0%. Average hourly earnings for private-sector production and nonsupervisory employees rose 0.2% during the month. Wage growth continues to outpace underlying inflation, supporting household purchasing power without generating the type of broad-based wage inflation that would likely concern Federal Reserve policymakers. ⁷

From a monetary policy perspective, the employment report did little to alter expectations for the Federal Reserve. At its July meeting, policymakers left the federal funds rate unchanged while continuing its policy of maintaining ample reserves in the banking system. Notably, three voting FOMC members dissented from the Committee's decision and preferred to raise the target range, highlighting a divergence of opinion among policymakers. The Committee ultimately maintained its cautious, data-dependent approach. ^8,10

Overall, the June employment report reinforced the narrative of a labor market that is cooling in an orderly fashion rather than deteriorating. Hiring has moderated from the exceptionally strong pace seen over the past several years, yet unemployment remains historically low, wage growth remains healthy, and layoffs continue to be limited. This gradual rebalancing is consistent with the Federal Reserve's objective of slowing labor demand without triggering a significant rise in unemployment, supporting the broader view that the U.S. economy may continue to move toward a soft landing. ⁷

The U.S. Leading Economic Index (LEI) declined 0.2% in June 2026 to 99.1, following a 0.1% increase in May. While the monthly decline suggests that growth continues to moderate, the broader trend has become noticeably more stable. The LEI has fallen just 0.3% during the first half of 2026, a marked improvement from the 1.1% contraction recorded during the second half of 2025. Although the index remains in negative territory on both a six- and twelve-month basis, the pace of deterioration has slowed considerably, supporting the view that the economy is transitioning toward slower—but still positive—growth rather than entering a recession. ⁶

June's decline was driven primarily by weaker consumer expectations and a drop in building permits across most categories, partially offset by continued strength in financial market indicators. The yield spread provided the largest positive contribution to the index, while other financial components also made modest positive contributions. These gains, however, were insufficient to overcome softer forward-looking consumer indicators and weakness in residential construction activity. Even so, The Conference Board noted that robust business investment, particularly in artificial intelligence infrastructure, data centers, and related technologies, continues to provide an important counterbalance to softer consumer-driven components of the economy. ⁶

One notable takeaway from the report is the gap between consumer sentiment and actual consumer behavior. While surveys continue to indicate that households remain cautious about future business conditions and the broader economic outlook, the hard economic data shows continued spending. Consumer spending provided a positive contribution during the second quarter GDP report, indicating that many households continued to spend despite concerns about inflation, interest rates, and the economy. This divergence suggests that consumers remain cautious after several years of elevated inflation, even as strong employment, rising wages, and healthy household balance sheets continue to support spending. ^1,6,11

Reflecting the economy's continued resilience, The Conference Board raised its 2026 U.S. GDP growth forecast from 1.8% to 1.9%, acknowledging that business investment related to artificial intelligence is helping offset softer consumer expectations while inflation continues to moderate. Taken together, the LEI suggests that the economy is not accelerating, but neither is it showing the broad-based weakness typically associated with an impending recession. Instead, the data continues to point toward a gradual normalization in economic activity, supported by resilient corporate investment and a consumer that remains considerably stronger in practice than in sentiment. ⁶

August will place the market's primary focus squarely on the heart of second-quarter earnings season, as investors seek confirmation that corporate America can continue delivering the robust earnings growth that has underpinned the current bull market. Following several months of exceptional market performance, expectations remain elevated, leaving little room for disappointment. Consensus expectations continue to anticipate relatively strong year-over-year earnings growth, although elevated expectations may leave markets sensitive to results and forward guidance. While reported results will undoubtedly drive individual stock performance, management commentary regarding the second half of 2026 will likely prove even more influential. Investors will closely scrutinize guidance on demand trends, pricing power, margins, capital spending, and free cash flow generation to determine whether the earnings momentum that has supported the market remains intact.

The bond market is also likely to remain a central theme after July's sharp rise in long-term Treasury yields. The growing disconnect between the Federal Reserve's policy rate and market-determined borrowing costs has become increasingly important for investors. Even without an official increase in the federal funds rate, higher long-term yields have tightened financial conditions across the economy, placing pressure on interest-rate-sensitive sectors including technology, real estate, utilities, and other long-duration assets. Investors will closely monitor whether Treasury yields begin to stabilize or continue climbing, as persistent upward pressure could weigh on equity valuations despite continued earnings growth. ^9,10

Economic data will continue shaping expectations for Federal Reserve policy. August brings another closely watched round of inflation, employment, retail sales, and manufacturing reports that will help determine whether the recent disinflationary trend remains intact. June's inflation report provided evidence that the energy-driven price spike following the Iran conflict is beginning to unwind, while the labor market has continued to cool in an orderly fashion without a meaningful increase in unemployment. Should these trends persist, markets may become increasingly confident that inflation is moving sustainably toward the Federal Reserve's target. However, policymakers have repeatedly emphasized that they require several months of consistent data before considering a shift toward lower interest rates, suggesting that monetary policy will remain firmly data dependent. ^5,7,10

Seasonal trading patterns can contribute to lower market liquidity and increased volatility during August. At the same time, corporate earnings, economic growth, inflation trends, and long-term investment themes remain key factors for investors to monitor. Following the market's substantial gains over the past year, periods of consolidation would not be unusual. Episodes of volatility may also prompt investors to reassess portfolio positioning, valuation discipline, and risk exposure. As the market moves deeper into the second half of 2026, earnings growth, capital allocation, and execution are likely to remain key drivers of market leadership.

The market enters the latter half of 2026 from a position of relative strength. Corporate earnings continue to expand at a pace well above historical averages, economic growth remains resilient despite elevated interest rates, and inflation has resumed its broader downward trend following the energy-driven spike earlier this year. Importantly, the current bull market continues to be supported by improving corporate fundamentals rather than expanding valuation multiples alone. As earnings estimates have increased, forward valuations have become more reasonable even as equity indices have approached record highs. This combination provides a different fundamental backdrop than a market driven primarily by expanding valuations. ^1,5,12,13

That said, market leadership may continue to evolve. The first half of the year was characterized by exceptionally strong performance among companies tied to artificial intelligence infrastructure. More recently, however, investors have become increasingly focused on execution, profitability, and capital allocation. As second-quarter earnings season progresses, management teams are being evaluated not simply on revenue growth, but on their ability to generate attractive returns from historically large capital investments. This represents a natural progression in the market cycle and reinforces the importance of emphasizing business fundamentals over thematic narratives alone.

Another notable development has been the broadening of market participation. While technology continues to contribute to long-term growth, other sectors, including financials, energy, healthcare, industrials, and real estate, have also increased their contributions to overall market performance. Broader participation distributes market returns across a wider range of companies and sectors. For diversified investors, this broader market participation may support maintaining balanced portfolio exposures rather than relying heavily on a single sector or investment theme. ¹²

Fixed income markets also warrant close attention. The increase in longer-term Treasury yields during July may suggest that financial conditions could tighten even when the Federal Reserve leaves its policy rate unchanged. Higher market interest rates affect borrowing costs, corporate financing decisions, commercial real estate valuations, and equity discount rates. As a result, investors may recognize that interest-rate risk is increasingly influenced by bond market dynamics in addition to Federal Reserve policy. Maintaining appropriate duration exposure and ensuring fixed income allocations remain aligned with long-term investment objectives could become increasingly important should long-term yields remain elevated. ⁹

Seasonally, late summer and early fall have historically exhibited distinct market patterns, with trading activity and market performance tending to weaken as September approaches. While these periods can produce headline-driven price swings, they may also lead investors to review portfolio allocations, consider rebalancing needs, evaluate gains in positions that have appreciated significantly, and assess areas where valuations and long-term fundamentals appear comparatively attractive. Periods of elevated volatility may warrant continued attention to portfolio objectives and longer-term positioning rather than short-term market movements. ¹⁴

Looking ahead, our investment process remains centered on diversification, valuation discipline, and long-term fundamentals rather than short-term market forecasts. We continue to emphasize businesses with durable competitive advantages, relatively strong balance sheets, consistent cash flow generation, and the ability to grow earnings across varying economic environments. At the portfolio level, maintaining appropriate diversification across sectors, market capitalizations, and asset classes remains an important risk-management tool as market leadership continues to broaden.

While geopolitical developments, monetary policy expectations, and economic data will continue to influence short-term market sentiment, long-term investment outcomes have historically been more closely associated with corporate earnings growth, cash flow generation, and disciplined portfolio management. We therefore remain focused on evaluating evolving market conditions through a long-term lens, using periods of volatility to reassess portfolio positioning and ensure allocations remain aligned with clients' investment objectives and risk tolerance rather than attempting to anticipate short-term market movements.