July 2025 Monthly Market Update

Equity markets advanced in July, with the S&P 500 increasing 2.2% to fresh record highs, powered by healthy second-quarter earnings and ongoing leadership from technology and AI-related sectors. U.S. Treasury yields moved slightly higher during the month, with fiscal deficits and inflation dynamics likely contributing to the move. The 10-year yield closed July up 13bps to 4.37%, while the 2-year yield rose 22bps to 3.94%, resulting in a modest flattening of the curve.

Credit spreads compressed in July, with high-yield OAS down 10bps to 2.86%. Developed international and emerging equity markets also delivered positive returns, aided by a weaker U.S. dollar, while commodities were mixed—oil prices eased from midmonth highs on improving supply, and gold held firm as softer real yields and lingering policy uncertainty supported demand for defensive assets.

Economic data in July reflected a cooling but resilient backdrop. Payroll growth slowed to 73,000, and revisions to prior months marked a downshift in hiring, while the unemployment rate increased one tick to 4.2% and wage gains moderated only slightly. Inflation remained relatively subdued, with headline (2.6%) and core (2.8%) PCE readings increasing slightly over June’s pace, with early signs of firming in goods prices but cooling in services, particularly shelter. Consumer spending remained steady despite higher borrowing costs, while business surveys, including ISM manufacturing and services, pointed to a gradual loss of momentum rather than a sharp contraction, reinforcing the view of an economy transitioning toward a cool down in activity.

Policy developments in July continued to be dominated by trade headlines, with monetary policy also in the background. The Federal Reserve held rates steady at the July FOMC meeting, maintaining its “wait-and-see,” data-dependent stance, with its dual mandate of sub-2% inflation and full employment effectively pulling in opposite directions. Toward the end of July and into early August, the administration renewed tariff threats on several major trading partners while extending certain deadlines, injecting a measure of uncertainty into global trade discussions as several key early-August deadlines approached. Fiscal policy remained in the background, with persistent deficit concerns and heavy Treasury issuance contributing to a modest upward bias in long-term yields.

All things considered, July’s market tone was one of cautious optimism, shaped by a challenging outlook on inflation, a steady, but cooling labor market, and a Federal Reserve content to hold policy steady while awaiting clearer evidence that disinflation and slower growth are becoming firmly established.

Market Anecdotes

• Labor market dynamics, flat consumer spending, slowing revolving credit, decelerating real income growth, and an increase in delinquencies across credit card and auto loans suggests it may be a stretch for the U.S. consumer to continue to be the driving force for the U.S. economy. 
• Modeling of real wage growth and income levels suggests a majority of earners are maintaining purchasing power with the lowest income quartile lagging behind, but complex policy decisions related to stickiness of inflation and impacts of price level versus price rate of change remain.
• The latest chapter of wild swings in trade tax policy continued with a renewed barrage of tariff announcements. Financial markets flashed a bit of anxiety given the large amount of noise in the data and the complicated outlook, but long-term impacts are far from decided. 
• Equity markets are continuing to focus on ample liquidity, economic resilience, positive earnings growth, and AI momentum with sluggish labor/ housing markets, high tariff taxes, a restrictive Fed, and full valuations in the back seat.
• CA notes that the large scale AI infrastructure buildout by tech giants Google, Amazon, Meta, Microsoft, and Oracle on the whole amounts to nearly 1% of US GDP.

Bullish Asset Allocation Narratives

• Constructive corporate earnings with little evidence of margin compression to date. 
• Peak tariff uncertainty is likely in the rear view. Officials are aggressively pursuing anything resembling “deals” in order to put disruptive tariff tax policy uncertainty behind us.
• Business friendly deregulation and a large front end loaded fiscal budget deficit spending package coming from D.C.

Bearish Asset Allocation Narratives

• Tariff taxes are rising to multi-decade highs which translate to higher input costs pressuring both businesses and consumers with implications across growth, inflation, and spending.
• Trade policy uncertainty hurts business and consumer sentiment carrying risks to employment (deferred hiring), capital expenditures, and consumption.
• The polarizing split between a slowdown in growth and labor markets contrasted with above target inflation and upward price pressures may require the Fed to overstay current restrictive monetary policy.

Outlook

Recommended equity market positioning remains cautiously constructive, as it has throughout the year, with an expectation that we will eventually see some consolidation given the short-term overbought nature of the market on the back of a hyper recovery off the early April tariff panic lows. The two leading ‘consolidation candidates’ are tariff-related volatility not being fully behind us yet, particularly with regard to China, and that we are seeing more tangible evidence of a general slowdown in labor markets and the overall economy. That said, consumption indicators are reinforcing a stay the course message with routine rebalancing into strength. From a duration standpoint, we expect bond yields to remain relatively range bound and are maintaining a neutral duration stance accordingly. While very tight, we do not see a material risk to credit spreads widening materially in the near term given our fundamental outlook.