Key Points:
- Stocks were mixed in July with value stocks dramatically outperforming growth.
- The Federal Reserve kept rates steady at their July meeting but expectations for rate hikes this year are emerging.
- Strong earnings have kept the market moving higher but the uncertainty for global energy markets remains a key risk.
July was a volatile month for stocks with mixed returns across the major market indices. The Dow Jones Industrial Average rose 0.4%, the S&P 500 edged slightly lower, and the tech-heavy NASDAQ declined 3.2%. Many artificial intelligence leaders from the past year fell as investors questioned whether the scale of spending supports current valuations. Technology was the worst performing sector in July, down 3.4%, as investors moved away from high-flying semiconductor and memory stocks and shifted toward value and defensive names. Energy was the best-performing U.S. sector, rising 12.6%, as renewed conflict in Iran threatened Middle East oil supplies and pushed energy prices higher. Financials gained 6.2% for the month, reflecting the strong outperformance of value over growth stocks this year.
The Federal Reserve kept interest rates steady at their July meeting, citing a resilient U.S. economy, stable labor markets, but elevated inflation. Markets are now beginning to price Fed funds rate hikes in the coming months. Intermediate and long Treasury bond yields moved higher, putting pressure on existing bonds. Oil prices briefly fell into the $70s at the start of July before climbing above $90 and ending the month in the $80s. The rise in oil prices has renewed investor concerns about inflation and pushed bond yields higher. Higher yields reduce the prices of existing bonds, moving the Bloomberg U.S. Aggregate Bond Index into negative return territory for the year.
International equities were volatile in July as well. Emerging markets that benefited from their role as key suppliers to the AI buildout sold off sharply, with Korea down 17% for the month and Taiwan dropping 5%. Meanwhile, several lagging international markets rebounded as investors shifted toward less crowded areas. Hong Kong rose 11%, Chinese equities gained 9%, and the U.K. rallied 5%. Both developed and international markets are outperforming the S&P500 year to date, rewarding globally diversified investors.
Despite significant headwinds so far this year—including conflict with Iran, high energy prices, elevated inflation, tariffs, and weak consumer confidence—equity markets continue to approach all-time highs. Strong earnings have been the main driver, helping the market climb the proverbial wall of worry this year. A resolution in Iran should help stabilize energy markets and bring global inflation down.
Sources: Morningstar Direct, Wall Street Journal, First Trust, Merrill Lynch