July 2026 Market Commentary: Markets Hold, AI & Iranian war top of mind
Markets remained in a holding pattern in July, as we feel a tug-of-war between the potential upsides of AI innovation and the downsides of an ongoing war in Iran.
We saw no changes in our data-driven Three Dials allocation framework during the month of July, as we summarize below.
TECHNICAL
Despite the recent consolidation, all major equity indexes appear to have strong technical floors in place. While there is certainly more going on underneath the hood than the typical summer doldrums might suggest, our Technical Dial remains in a Positive position.
ECONOMIC
We got our first look at Q2 GDP in July which, despite a disappointing headline number of +1.5% annualized growth, showed signs of strength with both consumption and private investment advancing at a +3% pace. However, we continue to see signs of stress with lower-income consumers, particularly in the rise of “buy now, pay later” loans, where more than half of users in a recent survey say they wouldn’t be able to make ends meet without them, and nearly a third of users rely on them for basic staples like groceries. For now, we continue to leave our Economic Dial in a Negative position.
VALUATION
Despite what has been a robust start to Q2 earnings season, investors are becoming more discerning on the quality of earnings within the tech space, with both Meta and Alphabet falling despite a decent print as traders scrutinized their inflated AI-related capital expenditure plans. Combined with pressures from rising bond yields, P/E ratios are likely to be compressed, which leaves our Valuation Dial in a Negative position.
MARKET COMMENTARY
Markets remained in a holding pattern during the month of July, as we continue to feel a tug-of-war between the potential upsides of AI innovation and the downsides of an ongoing war in Iran. The S&P 500 was flat for the month, with gains in energy stocks on the back of resurgent oil prices offset by a selloff in tech stocks over concerns around valuation and long-term profitability. The blue-chip index is still up +10% year-to-date. International stocks were also mixed, with developed market equities rallying +2% in July (+12% YTD), while emerging markets fell -3%, dragged down by chipmakers in Taiwan and Korea, though the MSCI Emerging Markets Index is still up +18.5% for the year. Small cap stocks pulled back -3% in July, though the Russell 2000 Index remains the best performing major asset class with a +19% year-to-date return. Within fixed income, bond markets pulled back in July despite a second consecutive rate pause from the Fed, with long-term rates rising on inflation fears. The Bloomberg Aggregate Bond Index fell -1.3% for the month and is now down -0.7% on the year. Commodity prices continued their volatile ride, with the +18% spike in oil prices offset somewhat by a -3% decline in precious metals. The Bloomberg Commodity Index was up +7.5% for July for a +23% gain YTD.