A Strong July Cloaked in Caution
Markets moved higher in July, supported by resilient earnings and better-than-expected economic data. Yet, the rally masked deeper undercurrents of uncertainty. As the month unfolded, ongoing tariff negotiations and shifting expectations around Federal Reserve policy reminded investors that the path forward remains complex. While the major indexes climbed, the underlying picture was less universally bullish—revealing cracks beneath the surface of headline gains.
Earnings Continue to Impress Amid Cost Pressures
Corporate earnings were a key driver of July’s optimism. With over one half of companies reporting, second-quarter results showed strong year-over-year growth, with 78% of the firms exceeding consensus expectations. Forward-looking guidance for the remainder of 2025 remained positive, reinforcing the belief that profit momentum is holding up despite rising input costs and global trade disruptions.
One notable aspect of this earnings season was how firms managed tariff-related pressures. Rather than passing the full brunt of cost increases onto consumers, many companies drew down inventories or absorbed a portion of the hit—choosing to preserve market share and demand rather than test pricing elasticity. This strategic decision helped limit inflationary spillover effects and may explain the resilience in consumer spending. However, this approach could pressure profitability if cost conditions worsen in the second half of the year.
A Shifting Global Trade Landscape
Trade tensions were another major theme in July, as nations scrambled to secure tariff agreements with the United States ahead of the looming August 1 deadline. Formal deals were reached with the European Union, Japan, Vietnam, Mexico and the United Kingdom—each accepting higher tariffs than hoped for and boosting average U.S. tariffs to around 15%. While these agreements provided short-term clarity, they also introduced longer-term economic headwinds, particularly for regions already struggling with sluggish growth.
The European Union’s acceptance of a 15% tariff came after intense internal debate and is projected to drag down GDP growth by 0.4% over the next few years. Similarly, Japan’s agreement—coupled with significant concessions on U.S. investment—sparked political unease at home. A late-breaking and unexpected move by the U.S. to impose a 25% tariff on Indian exports raised the geopolitical stakes further, citing India’s engagement with Russian defense and energy sectors, along with its participation in the BRICS initiative aimed at reducing reliance on the U.S. dollar.
These developments suggest that while the trade front appears more stable on paper, underlying tensions are still unresolved. The potential for further escalations—especially involving China—continues to cast a shadow over the global economic outlook.
Economic Data Paints a Mixed Picture
On the domestic front, macroeconomic data released in July largely beat expectations. Purchasing manager indexes, while not robust, either stabilized or edged higher. Consumer fundamentals remained firm, with June’s personal income rising and spending surprising to the upside. These signals suggest that households continue to play a key role in sustaining growth, even as interest rates remain elevated—putting the lower income segments at particular risk.
Durable goods orders declined, but the pullback was milder than predicted. More encouragingly, business investment—especially in tech and AI-related capital expenditures—continued to rise sharply. This trend underscores a growing belief in the productivity-enhancing potential of artificial intelligence and automation, which could become a long-term offset to demographic drag and stringent anti-immigration tactics.
Narrow Leadership in Equity Markets
The S&P 500 gained 2.17% in July and set 10 new record highs, supported by six of its eleven sectors. Technology was the clear standout for the third consecutive month, continuing to benefit from investor enthusiasm around AI. However, the gains were heavily influenced by a small group of mega-cap stocks. Excluding the so-called "Magnificent 7," the broader index was largely flat.
This concentration suggests that while indexes appear strong, breadth could become a concern. A sustained bull market typically requires broader participation across sectors and market caps. Without it, equity markets may be more vulnerable to correction should the very optimistic sentiment shift around these leading names.
Labor Market Signals a Turning Point
July’s labor report was a key inflection point. Non-farm payroll growth fell well short of expectations, and the unemployment rate nudged higher to 4.2%. Adding to the unease were significant downward revisions to job growth for both May and June. These data points sparked fears that the labor market may be softening more rapidly than previously thought.
Compounding these concerns was the abrupt dismissal of the Bureau of Labor Statistics official responsible for overseeing employment data. This action raised eyebrows and led to speculation about political interference or deeper internal conflict over data integrity. Although still early, this incident has added a layer of uncertainty to how future labor figures will be interpreted by both markets and policymakers.
Fed Holds Steady—For Now
The Federal Reserve left its benchmark interest rate unchanged at 4.25%–4.50% during its July meeting. The decision reflected a delicate balancing act: inflation remains elevated, but growth indicators are softening. Two governors dissented in favor of a rate cut—a rare event last seen in 1993—signaling an emerging split within the central bank.
While the Fed offered no clear guidance on the timing of future moves, markets responded to the weak labor data by pricing in a 0.25% cut in September and another in December. Still, investors’ reaction was less sanguine than in prior months. The market's earlier habit of rallying on weak data—under the assumption that it would force the Fed’s hand—appears to be fading. The July labor report may mark a turning point where bad news is, once again, just bad news.
Looking Ahead: Opportunity Amid Dislocation
While July brought plenty of positives, we remain cautiously optimistic rather than euphoric. Earnings growth and technological investment are clearly supportive of long-term equity appreciation. Yet short-term risks are growing: valuations are once again elevated, market breadth is thinning, and macro uncertainty tied to trade, labor, and central bank policy is likely to spur volatility in the coming months.
Longer term, we believe structural tailwinds—particularly AI-driven productivity gains—will help the economy adapt and grow even in the face of policy and demographic challenges. Our investment positioning reflects this balance: prepared for bumps in the road, but confident in the strength of the engine under the hood will provide buying opportunities if the markets do undergo a sell-off in the near-term.
