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Stock markets followed a relatively tranquil path in July — even as they continued to reach new record highs. The S&P 500 gained 2.2% during the month, while the Nasdaq Composite increased by 3.7%. Developed international markets lagged in July, mostly due to the strengthening of the U.S. dollar, but remain ahead of U.S. stocks for the year. The MSCI EAFE, which tracks developed markets, lost 1.4%, while the MSCI ACWI, which includes emerging markets, gained 1.4%. Volatility stayed low throughout the month.
Strong second-quarter earnings bolstered July’s positive stock market performance. As of August 3rd, 82% of the S&P 500 companies that had reported so far had delivered a positive earnings surprise. The Technology sector, in particular, has posted strong second-quarter earnings. Other sectors, including Industrials and Financials, have also performed well, while Energy and Healthcare earnings have underperformed.
In bond markets, yields compressed across the curve during July as investors weighed persistent concerns about inflation, the path of interest rates, and the broader policy environment. The downward shift in yields reflects elevated investor demand for safe-haven assets, expectations that the Fed will cut interest rates later this year, and uncertainty about the durability of economic growth. Credit spreads remained relatively stable, suggesting confidence in corporate fundamentals despite the shifting rate outlook. Outside the U.S., international bond markets continue to present compelling relative value, particularly in regions where central banks moved earlier or more aggressively to cut rates.
Source: US Dept of the Treasury
Mixed Economic Data May Point to a September Rate Cut
The U.S. economy remains on relatively solid ground, with a notable exception. In the first quarter, U.S. gross domestic product (GDP) declined following a surge in imports ahead of threatened tariffs. In the second quarter, that dynamic reversed itself as imports fell 30%, and GDP recovered to a 3% annualized rate, higher than the consensus estimates. Consumers are beginning to see the impact of tariffs in price increases. Still, it hasn’t yet been dramatic: Core PCE Inflation, the Federal Reserve’s (Fed’s) preferred gauge, moved slightly higher, with the index rising from 2.4% in May to 2.6% in June. Excluding food and energy prices, Core PCE Inflation rose 2.8% in June. Both rates are higher than the Fed’s inflation target of 2%. Meanwhile, the U.S. employment appears to be softening. The July jobs reports released August 1st showed that job growth unexpectedly slowed in July to 73,000, below expectations. May and June job growth numbers were also revised sharply downward, and unemployment increased slightly to 4.2%.
The Fed kept interest rates unchanged in July, prior to the release of July employment numbers. The decision was not unanimous: Two members of the Federal Reserve Board of Governors, who play an integral role in Federal Open Market Committee (FOMC) meetings, voted in favor of lowering rates. The last time the FOMC saw two dissenting votes from Fed governors was in 1993. Despite political pressure, Chairman Jerome Powell has maintained his stance that economic data alone will drive any decision to cut interest rates. The softening employment picture opens the door wider to a September interest rate cut. The Fed has “roughly” a month to decide, and additional inflation and employment reports to review, before making a decision. It seems likely, however, that we will see two to three interest rate cuts by early 2026.
Tariff Policy Evolves Amid Ongoing Negotiations
Following a month of intense negotiations, the U.S. administration finalized a broad set of new reciprocal tariffs on August 1st, affecting goods from more than 60 countries. While several major trading partners, including the European Union, Japan, South Korea, Indonesia, and Thailand, successfully reached agreements before the deadline, others did not. Canada now faces a 35 percent tariff on select imports, with additional penalties targeting transshipped goods. Brazil received the steepest increase, with tariffs rising to 50 percent due to ongoing political disputes. Tariffs on India and Taiwan were also raised, although both countries continue to negotiate with U.S. officials. Although the tariffs were initially scheduled to take effect immediately, implementation was delayed until August 7th to allow U.S. Customs to finalize administrative processes. A legal challenge questioning the executive authority under the International Emergency Economic Powers Act is underway, adding another layer of uncertainty. After the calm of July, volatility increased on August 1st as global markets digested the latest tariff news. It remains to be seen whether the markets will continue to adapt as trade dynamics evolve, and if we will experience another period of sustained volatility later in the year.
Positioning Portfolios Amid Shifting Policy and Market Conditions
For investors, the recent strong equity performance presents a timely opportunity to revisit asset allocations and ensure they remain aligned with long-term objectives. While markets have generally held steady through the summer, that calm may not persist. Evolving monetary policy, global developments, and shifts in investor sentiment may all influence the market environment in the months ahead. Taking advantage of a summer lull can help ensure portfolios remain thoughtfully aligned with long-term objectives and ready to respond to new opportunities as they arise.
1 CNBC, “S&P 500 Earnings Season Update: August 1, 2025,” August 1, 2025, https://insight.factset.com/sp-500-earnings-season-update-august-1-2025
2 Reuters, “Fed policy decision generates most governor dissents since 1993,” July 30, 2025, https://www.reuters.com/world/us/fed-policy-decision-generates-most-governor-dissents-since-1993-2025-07-30
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