Economic Cycle
The U.S. economy remained on solid footing through July as continued business investment, supported in part by ongoing spending on artificial intelligence infrastructure, remained an important source of growth. Consumer spending also proved resilient, although households have increasingly relied on a multi-year low savings rate to help support spending, while the labor market remained healthy, with layoffs and new unemployment claims continuing to run at relatively low levels.
Inflation likewise continued to move in the right direction, although renewed conflict in the Middle East served as a reminder that geopolitical events can quickly influence energy prices and the near term inflation outlook. Despite those uncertainties, the broader economic backdrop continues to point toward a resilient expansion supported by continued capital investment, a stable labor market, and gradually moderating inflation.
Equity Markets
U.S. large cap equities finished little changed in July, but the headline return masked meaningful shifts beneath the surface. Value stocks modestly outperformed growth, supported in part by Energy, the market’s strongest performing sector, as renewed conflict in the Middle East pushed oil prices higher. International equities also continued to outperform U.S. stocks, extending one of the year’s most notable market trends.
Within technology, leadership continued to evolve. Several of the year’s strongest performers across semiconductors and AI infrastructure, particularly memory-related companies, gave back a portion of their outsized gains, while software stocks rebounded. Artificial intelligence remains one of the market’s defining long term investment themes, but recent performance is a reminder that leadership within the AI ecosystem will likely continue to evolve.
Fixed Income Markets
Fixed income markets declined in July as rising Treasury yields weighed on returns across most sectors. Although the Federal Reserve left interest rates unchanged, its unusually divided vote and cautious stance toward inflation reinforced uncertainty surrounding the path of monetary policy. Combined with renewed volatility in energy prices following developments in the Middle East, investors continued to push back expectations for near term rate cuts.
Although higher interest rates pressured bond prices during the month, they also continue to provide investors with a more attractive level of income than has been available for much of the past decade. High yield bonds modestly outperformed investment grade corporates as their shorter duration helped offset the impact of rising Treasury yields, while healthy corporate fundamentals continued to support credit markets more broadly.
Our Perspective
July served as a reminder that even during strong bull markets, leadership beneath the surface can change quickly. The AI investment cycle continues to support both the economy and corporate earnings, yet investors have become increasingly discerning about which companies are most likely to generate attractive long term returns from that investment. As a result, leadership has begun to broaden across sectors, styles, and regions even as artificial intelligence remains the market’s dominant secular theme.
Periods like these often feel uncomfortable because market leadership changes quickly, but they also reinforce the value of maintaining a diversified portfolio. While short term sentiment will likely continue to shift alongside earnings reports, geopolitical developments, and monetary policy expectations, long term investment success remains driven by owning high quality businesses capable of creating value across a variety of market environments.
Monthly Recommendation
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Indicator Sources: Bureau of Economic Analysis (BEA) — Real GDP estimate & Core PCE (bea.gov / fred.stlouisfed.org) | Department of Labor (DOL) Jobless Claims (fred.stlouisfed.org) | Census Bureau Retail Sales (census.gov) | University of Michigan Surveys of Consumers (sca.isr.umich.edu) | ICE BofA High Yield Option-Adjusted Spread (OAS) (fred.stlouisfed.org).
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