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July’s volatility tested investors’ confidence in the market. A sharp drop in semiconductor and AI-related stocks pulled the market lower for most of the month. Rising oil prices and Treasury yields, driven by a new flare-up in the U.S.-Iran conflict, added to the uncertainty. Then, in the final two trading days of July, the mood lifted. Encouraging earnings from the technology and cloud-computing industries sparked a rally. On July 30th, the S&P 500 Index gained 1.7%, the Nasdaq Composite rose 2.8%, the Dow Jones Industrial Average advanced 1.2%, and the Russell 2000 added 1.4%.1 The gains continued through the 31st, despite mixed results in the technology sector. The rebound came mostly from a handful of large companies rather than the broad market, but still helped the major indexes regain much of their losses from earlier in the month. Overall, it appears that July delivered more of a market rotation and a reset in investor expectations than the start of a sustained market deterioration.
Economic Growth Remains Resilient
The data suggest that the economy is moderating from a solid pace, rather than moving toward a contraction. Second-quarter GDP grew at a 1.5% annualized rate, down from 2.1% in the first quarter.2 But the headline number understated the strength of underlying private-sector activity. Despite subdued consumer confidence,3 consumer spending has been resilient and picked up in July. Real final sales to private domestic purchasers, which offer a clearer read on private demand, rose 3.9%, up from 1.7%.2 Business investment and exports added to growth, while declining government spending and higher imports pulled the headline figure down.
Inflation Improves, but the Path Remains Uneven
June inflation moved in the right direction, although energy prices continued to add to uncertainty. Headline PCE inflation, which includes volatile energy prices, eased to 3.7% year over year from 4.1%. Core PCE, the Fed’s preferred inflation gauge, ticked down to 3.3% from 3.4%. On a monthly basis, headline prices declined 0.1%, while core prices rose only 0.1%.4 The June report shows encouraging progress, though inflation remains above the Federal Reserve’s (Fed’s) 2% goal. Higher oil prices could stall that progress for a while, especially in the headline numbers. The Fed’s challenge will be separating short-lived energy pressure from stickier underlying inflation. The current environment does not necessarily indicate a renewed inflation cycle, but it does suggest that progress may remain uneven.
The Federal Reserve Maintains Flexibility
The Fed remains focused on inflation but has not committed to raising interest rates at its September meeting. In July, the Federal Open Market Committee held its target range at 3.50%-3.75% for a fifth straight meeting. Three officials favored raising rates by a quarter point, while the majority preferred to wait.5 The Fed is also relying less on forward guidance and more on a broad flow of data and market signals. Higher Treasury yields have already tightened financial conditions, which may reduce the need for the Fed to take immediate action on rates. Futures markets still indicate that a September rate hike is possible, though conviction faded after the July meeting. Fresh jobs and inflation data will arrive before the September meeting, and a resilient economy gives the Fed time to assess whether recent price pressures are likely to persist.
Source: Board of Governors of the Federal Reserve System, CME Group (Fed Funds Futures)
Oil Remains an Important Swing Factor
Oil was July’s wild card. Renewed tension in the Middle East pushed WTI crude toward $92 a barrel, then prices fell sharply on reports of another ceasefire.1 That quick reversal shows how quickly a geopolitical risk premium can enter and leave the oil market. If higher prices persist, they could ripple through inflation, consumer spending, Treasury yields, and Fed expectations. If the Middle East stabilizes and oil prices retreat, the opposite holds: less pressure on headline inflation and more spending power for consumers. Oil prices should be monitored, but they should not be treated as the sole determinant of the economic or market outlook.
Source: Bloomberg
Strong Earnings Support the Market
Corporate earnings remain an important driver of the market, but high expectations may be setting investors up for disappointment. Through July 24th, 27% of S&P 500 companies reported second-quarter results, and 86% of them beat earnings estimates. This is well above both the five-year average of 78% and the 10-year average of 76%.6 Even setting aside an unusually large one-time gain, earnings growth remained strong. Earnings are on track for the seventh straight quarter of double-digit growth, with 10 of 11 sectors reporting year-over-year growth.6 Strong technology and cloud-computing results powered the late-July recovery, offering a reminder of how quickly sentiment can improve when fundamentals exceed expectations. While the earnings backdrop remains constructive overall, elevated valuations mean that disappointments may continue to trigger outsized reactions.
AI Remains a Major Investment Theme
The AI trade faced some pressure in July, but it remains an important investment theme. The Philadelphia Semiconductor Index fell more than 20% after more than doubling in the first half of the year.1 The correction did not necessarily signal weaker demand for AI infrastructure, but may instead reflect investors’ growing focus on whether high capital spending will generate sustainable cash flow and attractive returns on invested capital. Recent earnings showed continued strength in cloud-computing demand and AI-related infrastructure investment, and encouraging results late in the month helped restore confidence. The varied reactions across the technology sector suggest that investors are becoming more selective, but not broadly bearish, on AI. After a stretch when AI spending was rewarded almost automatically, a move toward greater differentiation may prove to be a healthy sign.
Market Leadership Is Broadening
One of 2026’s most encouraging trends continued in July: Beneath the headline index performance, market leadership is broadening. Outside of technology, several areas, including energy, financials, consumer staples, health care, and real estate, held up better during the selloff. Value, dividend, and lower-volatility stocks also beat growth and momentum stocks for much of the month. The equal-weighted S&P 500 outperformed the market-cap-weighted index for much of July and year to date.1 Mid- and small-cap stocks have also played a larger role in this year’s gains. The two-day rebound that ended July was led primarily by large technology companies. However, the market’s ability to rotate among leadership groups while broader indexes remain resilient is a constructive sign. Broader participation can reduce dependence on a single sector or small group of companies, supporting a more durable advance.
Source: YCharts
Portfolio Perspective
What does this mean for portfolios? The economic and earnings backdrop of positive growth, resilient consumer spending, expanding earnings, and broader participation continues to support diversified portfolios. Increased investor selectivity may create more volatility, especially in areas like AI that have seen the largest gains. For investors, diversification across sectors, investment styles, and asset classes remains important. Fixed income continues to provide attractive cash flow, though duration should be managed thoughtfully given inflation and interest-rate uncertainty.
The late-July rebound also carried a lesson about the importance of staying the course during market volatility: Investors who cut exposure after the semiconductor selloff may have missed the recovery that quickly followed. Of course, not every pullback rebounds so quickly, and past patterns are no guarantee of what comes next. In our view, maintaining a diversified, risk-balanced portfolio will help investors more easily navigate the range of potential market outcomes.
What We’re Watching
- Whether the late-July rebound carries into August, and whether participation continues to broaden beyond the largest technology companies.
- The July employment report and signs of further labor-market moderation.
- July CPI and the degree to which energy prices affect headline inflation.
- Oil prices and the durability of the U.S.-Iran ceasefire.
- Remaining second-quarter earnings reports and corporate guidance.
- Evidence that AI investment is translating into sustainable revenue, cash flow, and productivity growth.
- The July FOMC minutes and shifting market expectations ahead of the September 15th-16th meeting.5
Closing Thoughts
July reminded investors that volatility and shifting market leadership are normal, especially after strong runs and high expectations. Oil, interest rates, and the semiconductor correction created real uncertainty, yet the market’s strong finish reinforced the resilience that has defined much of 2026. The economy keeps growing, consumers keep spending, earnings are strong, and more of the market is participating.
The speed of the recovery also showed why reacting to short-term weakness can backfire. Markets often start to recover before the uncertainty clears. Despite inevitable periodic volatility, the fundamentals still support a disciplined, diversified, and long-term investment approach.
1 Bloomberg
2 U.S. Bureau of Economic Analysis, Gross Domestic Product, Second Quarter 2026 (Advance Estimate), July 2026
3 The Conference Board, Consumer Confidence Survey Press Release, July 2026
4 U.S. Bureau of Economic Analysis, Personal Income and Outlays, June 2026, released July 30, 2026
5 Federal Reserve, Federal Open Market Committee Press Release, July 2026
6 FactSet, S&P 500 Earnings Insight, July 24, 2026
7 CME Group, Fed Funds Futures (30-Day Federal Funds Futures), data as of July 31, 2026
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Index Definitions
The Standard & Poor’s (S&P) 500 Index is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market.
The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance.
The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market.
Dow Jones Industrial Average® (Dow Jones or DJIA) is a stock market index representing the price weighted average of 30 large, publicly owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The component stocks are accorded relative importance based on the prices, unlike other indices which weight by market capitalization. The companies in the DJIA are leaders in their industries, and their stocks are widely held by individuals and institutional investors.
The Russell 2000® Index is a capitalization-weighted index designed to measure the performance of a market consisting of the 2,000 smallest publicly traded U.S. companies (in terms of market capitalization) that are included in the Russell 3000® Index.
The PHLX Semiconductor Sector Index (SOX) is a capitalization-weighted index composed of the 30 largest U.S.-listed companies primarily involved in the design, distribution, manufacture, and sale of semiconductors. It was developed by the Philadelphia Stock Exchange and is widely used as a benchmark for the semiconductor industry.
West Texas Intermediate (WTI) crude oil is the primary U.S. benchmark grade of crude oil and is commonly used as a reference price for oil futures and physical barrels of crude produced in the United States. Oil prices referenced herein reflect WTI pricing. CSP2026244
